T 
356I4L 


UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


SCHOOL  OF  LAW 
LIBRARY 


A  TREATISE 

ON  THE  LAW  OF 

INCOME  TAXATION 

UNDER  FEDERAL  AND  STATE  LAWS 


BY 

HENRY  CAMPBELL  BLACK 

HI 

AUTHOR  OF  BLACK'S  LAW  DICTIONARY  AND  OF  TREATISES  ON  JUDGMENTS, 

BANKRUPTCY,  CONSTITUTIONAL  LAW,  INTERPRETATION 

OF  LAWS,  JUDICIAL  PRECEDENTS,  ETC. 


VERNON  LAW  BOOK  COMPANY 

KANSAS  CITY,  MO. 

1913 


COPYBIGHT,    1913 

BY 
HENRY  CAMPBELL  BLACK 

(BL.INC.TAX.) 


356/4; 
19/3 


PREFACE 


INCOME  taxation  as  a  source  of  public  revenue  has  been  in 
successful  operation  in  Great  Britain  for  more  than  a  century, 
and  today  constitutes  an  important  feature  of  the  economic 
policy  of  most  of  the  countries  of  continental  Europe.  In 
the  United  States  it  has  been  resorted  to,  experimentally  or 
to  meet  special  public  needs,  at  various  times  in  our  history. 
But  of  late  years  it  has  so  grown  in  favor  with  publicists 
and  legislative  bodies  that  it  appears  likely  to  become  a  per- 
manent institution  in  many  jurisdictions,  and  eventually  to 
supersede  all  forms  of  taxation  of  personal  property,  as  wit- 
ness the  Oklahoma  statute  of  1908,  the  elaborate  and  com- 
prehensive enactment  in  Wisconsin  in  1911,  and,  most  im- 
portant of  all,  the  act  of  Congress  of  1913.  The  economic 
phases  of  the  subject  have  received  much  attention,  but  hith- 
erto no  American  writer  has  discussed  in  detail  its  legal  as- 
pects or  the  application  of  the  rules  of  law  to  the  solution 
of  the  problems  which  inevitably  arise  in  the  administration 
of  an  income  tax,  and  the  few  English  text-books  afford  little 
or  no  assistance  to  the  American  lawyer.  It  has  therefore 
seemed  opportune  to  the  present  writer  to  prepare  a  syste- 
matic and  comprehensive  treatise  on  the  law  of  Income  Taxa- 
tion, under  both  the  federal  statute  and  the  laws  of  the  va- 
rious states,  and  the  volume  now  offered  to  the  public  is  the 
fruit  of  his  endeavors  in  that  behalf.  The  applicable  authori- 
ties have  been  diligently  collected,  and  it  will  be  found  that 
the  text  is  supported  by  an  exhaustive  citation  of  the  extant 
decisions,  both  of  the  federal  and  state  courts,  as  well  as  by 
references  to  many  English,  Scotch,  Canadian,  and  other  de- 
cisions, with  numerous  rulings  and  decisions  of  the  officers 
of  the  Treasury  Department  of  the  United  States,  opinions  of 
Attorneys  General,  and  other  authorities,  now  for  the  first 
time  collected  in  one  volume.  An  appendix  contains  the  full 
text  of  the  act  of  Congress  of  1913  and  of  the  present  income 

ttii) 


756484 


IV  PREFACE 

tax  laws  of  Wisconsin,  Virginia,  North  Carolina,  South  Caro- 
lina, Oklahoma,  and  Hawaii,  as  well  as  the  text  of  the  fed- 
eral income  tax  acts  of  1862  to  1870,  that  of  1894,  and  the 
corporation  excise  tax  law  of  1909.  These  statutes  are  of 
the  greatest  importance  for  purposes  of  comparison  and  con- 
struction, being  all  in  a  sense  in  pari  materia,  and  it  has  been 
thought  well  to  give  the  reader  an  opportunity  of  studying 
them  at  large  and  in  detail. 

The  following  pages  include  a  detailed  discussion  of  the  na- 
ture of  income  taxes  in  general,  the  constitutional  and  stat- 
utory provisions  applicable  thereto,  the  various  constitutional 
objections  to  their  validity  and  the  decisions  of  the  courts 
thereon,  the  rules  for  the  construction  of  income  tax  laws, 
the  various  questions  which  arise  in  the  practical  determina- 
tion of  what  constitutes  taxable  income,  and  concerning  the 
persons  and  corporations  subject  to  the  tax,  also  the  matter 
of  exemptions  and  exceptions,  deductions  and  allowances,  the 
depreciation  of  property  and  equipment,  and  the  amortization 
of  bonds,  and  further,  as  to  the  time,  form,  and  manner  of 
making  income  tax  returns,  publicity  of  returns,  penalties 
for  delinquency,  the  assessment  of  the  tax  and  appeals  there- 
from, the  rate  of  taxation  and  its  amount,  the  manner  and 
process  of  collecting  the  income  tax,  including  the  new  and 
important  feature  of  collection  "at  the  source,"  and  the  re- 
funding and  recovery  of  taxes  illegally  exacted. 

It  is  hoped  that  the  book  will  be  found  valuable  not  only 
to  individual  taxpayers  and  their  legal  advisers,  but  also  to 
the  financial  officers  of  corporations,  to  local  representatives 
of  foreign  companies  and  business  houses,  to  American  com- 
panies and  firms  doing  business  abroad,  and  to  banks,  bank- 
ers, and  trust  companies  collecting  foreign  interest  or  divi- 
dends, all  of  whom  have  a  direct  interest  in  the  taxation  of 
incomes,  and  who,  at  least  under  the  present  federal  statute, 
are  in  some  measure  charged  with  details  in  the  administra- 
tion of  the  law  itself. 

HENRY  CAMPBELL  BLACK. 
WASHINGTON,  D.  C.,  1913. 


TABLE  OF   CONTENTS 


TABLE  OF  CASES  CITED 
(Page  x) 

CHAPTER  I 

NATURE  OF  INCOME  TAXES 

Section 

1.  Definitions  and  General  Considerations. 

2.  Property  Taxes  Distinguished. 

3.  Excise,   Franchise,   License,   and  Occupation    Taxes   Distin- 

guished. 

4.  Tax  on  Gross  Receipts. 

5.  Income  Tax  as  Direct  Tax. 

CHAPTER  II 

CONSTITUTIONAL  AND  STATUTORY  PROVISIONS 

6.  Provisions  of  United  States  Constitution. 

7.  Provisions  of  State  Constitutions. 

8.  History  of  Income  Tax  Laws. 

9.  Income  Tax  Laws  in  Force. 

10.  Economic  Aspects  of  Income  Taxation. 

CHAPTER  III 

CONSTITUTIONAL  VALIDITY  OF  INCOME  TAX  LAWS 

11.  Requirement  of  Due  Process  of  Law. 

12.  Requirement  of  Equality  and  Uniformity. 

13.  Equal  Protection  of  the  Laws. 

14.  Discrimination  Between  Corporations,  Partnerships,  and  In- 

dividuals. 

15.  Discrimination  Between  Residents  and  Non-Residents. 

16.  Federal  Taxation  of  Corporations  Created  by  States. 

17.  Taxation  of  Income  from  Non-Taxable  Property. 

18.  Taxing  Salaries  of  Federal  and  State  Officers. 

19.  Exemption  of  Incomes  Below  a  Fixed  Sum. 

BL.INC.TAX.  (v) 


Vi  TABLE   OF  CONTENTS 

Section 

20.  Exemption  of  Classes  of  Individuals  or  Corporations. 

21.  Allowance  of  Deduction  for  Other  Taxes  Paid. 

22.  Double  Taxation. 

23.  Taxing  Aggregate  Income  of  Family. 

24.  Validity  of  Graduated  or  Progressive  Tax. 

25.  Retrospective  Operation  of  Statute. 

26.  Objections  as  to  Title,  Purpose,  and  Mode  of  Enactment  of 

Statute. 

27.  Objections  to  Administrative  Provisions  of  Act. 

28.  Apportionment  of  Federal  Income  Tax. 


CHAPTER  IV 
CONSTRUCTION  OF  STATUTES  IMPOSING  INCOME  TAXES 

29.  Rule  of  Strict  Construction. 

30.  Statutes  in  Pari  Materia. 

31.  Associated  Words  and  Phrases. 

CHAPTER  V 
WHAT   CONSTITUTES   TAXABLE   INCOME 

32.  General  Definitions  of  "Income." 

33.  "Profits"  and  "Gains"  Compared  and  Distinguished. 

34.  Change  or  Substitution  of  Capital  Distinguished. 

35.  Rent  of  Land  and  Royalties. 

36.  Rental  Value  of  Residence. 

37.  Salaries  and  Earnings  from  Professions  and  Trades. 

38.  Pensions,  Gifts,  Prizes,  and  Awards. 

39.  Legacies  and  Inheritances. 

40.  Products  of  Agriculture  or  Stock-Raising. 

41.  Produce  of  Mines  and  Oil  and  Gas  Wells. 

42.  Profits  of  Mercantile  Business. 

43.  Profits  from  Unauthorized  Business. 

44.  Income  from  Partnership  Business. 

45.  Profits  on  Sale  of  Real  Estate. 

46.  Profits  on  Sales  of  Securities. 

47.  Increase  in  Value  not  Realized  by  Sale. 

48.  Uncollected  Interest  and  Accounts. 

49.  Profit  to  Accrue  on  Uncompleted  Contracts. 

50.  Profits  from  Sale  or  Lease  of  Patent  Rights. 

51.  Annuities. 

52.  Interest  on  Government  Bonds. 


TABLE  OF  CONTENTS  Vll 

Section 

53.  Dividends  on  Corporate  Stock. 

54.  Same;    Stock  Dividends. 

55.  Accumulated  Earnings  or  Undivided  Profits  of  Corporations. 

56.  Right  to  Subscribe  for  New  Stock  of  Corporation. 

57.  Sale  and  Distribution  of  Assets  of  Corporation. 


CHAPTER  VI 
PERSONS  AND  CORPORATIONS  SUBJECT  TO  TAX 

58.  Residents. 

59.  Residents  Deriving  Income  from  Abroad. 

60.  Domestic  Corporations  with  Foreign  Branches  or  Agencies. 

61.  Non-Residents  and  Aliens. 

62.  Carrying  on  of  Business  or  Trade. 

63.  Carrying  on  Several  Lines  of  Business. 

64.  Salaried  Officers. 

65.  Bankrupt  and  Insolvent  Persons  and  Companies. 

66.  Estates  of  Decedents  and  Dissolved  Corporations. 

67.  Partnerships. 

68.  Limited  Partnerships. 

69.  Corporations. 

70.  Public  Sen-ice  Corporations. 

71.  Unincorporated  Associations. 

72.  Incorporated  Clubs. 

73.  Inactive  Corporations  and  Holding  Companies. 

74.  Corporations  of  Philippines  and  Porto  Rico. 

75.  Insurance  Companies. 


CHAPTER  VII 

EXEMPTIONS  AND  EXCEPTIONS 

76.  Revenues  of  United  States. 

77.  States  and  Municipal  Corporations. 

78.  Agricultural  and  Horticultural  Organizations. 

79.  Labor  Organizations. 

80.  Fraternal  Orders  and  Benefit  Societies. 

81.  Religious,  Charitable,  and  Benevolent  Associations. 

82.  Educational  and  Scientific  Institutions. 

83.  Building  and  Loan  Associations. 

84.  Savings  Institutions. 

85.  Civic  Organization  and  Chambers  of  Commerce. 


Vlll  TABLE   OF   CONTENTS 

Section 

86.  Income  from  Property  Otherwise  Taxed. 

87.  Proceeds  of  Life  Insurance  Policies. 

88.  Exemption  of  Fixed  Amount  of  Income. 


CHAPTER  VIII 
DEDUCTIONS   AND   ALLOWANCES 

89.  Expenses  of  Business. 

90.  Same;    Wages  and  Salaries. 

91.  Same;   Traveling  Expenses. 

92.  Same ;    Cost  of  Insurance. 

93.  Same;   Rent  of  Land,  Buildings,  or  Equipment. 

94.  Same;    Mining  Operations. 

95.  Same;  Judgments. 

96.  Repairs,  New  Buildings,  and  Improvements. 

97.  Interest  on  Indebtedness. 

98.  Taxes  Accrued  or  Paid. 

99.  Losses  Uncompeusated. 

100.  Debts  Written  Off  as  Worthless. 

101.  Depreciation  of  Property. 

102.  Depletion  of  Ores  or  Other  Natural  Deposits. 

103.  Amortization  of  Bonds. 

104.  Dividends  from   Corporations  Subject  to  Tax. 

105.  Special  Rules  as  to  Insurance  Companies. 

106.  Rules  as  to  Foreign  Corporations. 


CHAPTER  IX 

RETURN  OF  INCOME  AND  COLLECTION  OF  TAX 

107.  Taxpayers'  Returns,  Who  Required  to  Make. 

108.  Returns  by  Guardians,  Trustees,  and  Other  Fiduciaries. 

109.  Form  and  Contents  of  Return. 

110.  Including  Income  of  Wife  and  Children, 

111.  Time  for  Filing  Returns. 

112.  Where  Returns  are  to  be  Filed. 

113.  Publicity  or  Inspection  of  Returns. 

114.  Penalties  for  Divulging  Information. 

115.  Proceedings  in  Case  of  Refusal  or  Neglect  to  File  Return. 

116.  Same;    Examination  of  Books,  Papers,  and  Witnesses. 

117.  Assessment  of  the  Tax. 

118.  Appeal  and  Review  of  Assessment. 

119.  Rate  of  Tax. 


TABLE  OP   CONTENTS  IX 

Section 

120.  When  Tax  is  Payable. 

121.  Penalties  for  Delinquency  and  False  Returns. 

122.  Lien  of  Tax. 

123.  Process  for  Recovery  of  Tax. 

124.  Compromise  of  Litigation. 

125.  Collection  at  the  Source. 


CHAPTER  X 

REFUNDING    AND    RECOVERY    OF    TAXES    ILLEGALLY    EX- 
ACTED 

126.  Statutory   Provisions. 

127.  Payment  of  Tax  Under  Protest. 

128.  Refund  by  Commissioner  of  Internal  Revenue. 

129.  Suit  to  Enjoin  Collection  or  Payment. 

130.  Suit  for  Recovery  of  Taxes  Paid. 

131.  Same;    Appeal  to  Commissioner  as  Pre-requisite. 

132.  Remission  of  Penalties. 


APPENDIX 

(Page  265) 


INDEX 

(Page  381) 


TABLE  OF  CASES  CITED 


[THE  FIGURES  REFEB  TO  SECTIONS] 


Abbott  v.  City  of  St.  John,  64. 
Abrast  Realty  Co.  v.  Maxwell,  73, 

127. 
Academy  of  Fine  Arts  v.  Philadel- 

phia County,  82. 
Adams  Express  Co.  v.   Schofield, 

71. 

Addie  &  Sons,  In  re,  94. 
Aikin  v.  Macdonald's  Trustees,  90. 
Alderman  v.    Wells,  1,  11,  12,  13, 

22,  24,  26. 

Alianza  Co.  v.  Bell,  41,  102.   ' 
Allen  v.  Long,  71. 
Ambrosini  v.  United  States,  16. 
American    Net    &    Twine    Co.    v. 

Worthington,   29. 
Andrews  v.  Boyd,  32. 
Anglo-Continental    Guano    Works 

v.  Bell,  97. 

Antoni  v.  Greenhow,  17. 
Apthorpe    v.    Peter    Schoenhofen 

Brewing  Co.,  60. 
Arizona  Copper  Co.  v.  Smiles,  41, 

97. 

Armitage  v.  Moore,  65. 
Assets  Co.  v.  Inland  Revenue,  46. 
Attorney    General    v.    Borrodaile, 

62. 

Attorney  General  v.  Ostrum,  37. 
Attorney  General  v.  Scott,  77. 


B 

Babbitt  v.  Selectmen  of  Savoy,  89. 
Bangor  v.  Masonic  Lodge,  81. 
Barhydt  v.  Cross,  58. 
Barrett  v.  Bloomfleld  Sav.  Inst, 


84. 


Bartholomay  Brewing  Co.  v.  Wy- 
att,  60. 

Bates  v.  Bank  of  Alabama,  45. 

Bates  v.   Porter,  32,  33. 

Bedford's  Appeal,  35. 

Bell's  Gap  R.  Co.  v.  Pennsylvan- 
ia, 13. 

Benziger  v.  United  States,  29. 

Bettman  v.  Warwick,  18. 

Betts  v.  Betts,  36. 

Biddle's  Appeal,  56. 

Birmingham  Corp.,  In  re,  77. 

Black  v.  State,  19. 

Blake  v.  London,  81. 

Bonaparte  v.  Tax  Court,  17. 

Bradey  v.  Dilley,  89. 

Braun's  Appeal,  96. 

Brewers'  Ass'n  v.  Attorney  Gen- 
eral, 5. 

Bridge  v.  Bridge,  92. 

Brinley  v.  Grou,  56. 

Brown  v.  Burt,  58,  61. 

Brown  v.  Watt,  63,  99. 

Brown's  Trustees  v.  Hay,  116. 

Buckley   v,  Briggs,  45. 

Burch  v.  Savannah,  22. 

Burd  Orphan  Asylum  v.  School 
Dist,  81. 

Burnley  Steamship  Co.  v.  Aikiu, 
101. 

Burt  v.  Rattle,   33. 

Butler  v.  Pennsylvania,  18. 


Caledonian  Ry.  Co.  T.  Banks,  96. 
California  v.  Central  Pac.  R.  Co., 

16. 
Californian   Copper   Syndicate  v. 

Harris,  46. 


BL.INC.TAX. 


CASES  CITED 
[The  figures  refer  to  sections] 


Calvert  v.  Walker,  115. 

Campbell  v.  Shaw,  24. 

Carlisle  &  S.  Golf  Club  v.  Smith, 

72. 

Cass  Farm  Co.  v.  Detroit,  11. 
Cawse    v..    Nottingham     Lunatic 

Asylum,  81. 
Central     Nat.     Bank    v.     United 

States,  22. 
Cesena  Sulphur  Co.  v.  Nicholson, 

59. 

Chapman  v.  Barney,  68. 
Chester  v.  Buffalo  Car  Mfg.  Co., 

54. 

Chisholm  v.  Shields,  22. 
Christie-Street  Commission  Co.  v. 

United  States,  130. 
City  Council  v.  Lee,  64. 
City  of  Dublin  Steam  Packet  Co. 

v.   O'Brien,  97. 
City  of  Dubuque  v.  Northwestern 

Life  Ins.  Co.,  2. 
City  of  London  Contract  Corp.  v. 

Styles,  89. 

City  of  New  Orleans  v.  Lea,  18. 
Clark,  In  re,  33. 
Clayton  v.  Newcastle-Under-Lyme 

Corp.,  96. 

Cleveland   Library   Ass'n   v.   Pel- 
ton,  81,  82. 
Clifford  v.  State,  45. 
Collector  v.  Day,  16,  18. 
Collector  v.  Hubbard,  131. 
Coltness  Iron  Co.  v.  Black,  94. 
Colton  v.  Montpelier,  19. 
Commissioners  of  Inland  Revenue 

v.  Incorporated  Council  of  Law 

Reporting,  107. 
Commissioners     of    Taxation     v. 

Teece,  89. 

Commonwealth  v.  Brown,  3,  12. 
Commonwealth  v.  Ocean  Oil  Co., 

41,  102. 
Commonwealth  v.  Philadelphia  & 

E.  R.  Co.,  93. 
Commonwealth    v.    Reading    Sav. 

Bank,  84. 
Comstock  v.  Grand  Rapids,  22. 


Conner  v.  New  York,  18. 
Cook  v.  Knott,  91. 
Cooper  v.  Blackiston,  38. 
Cooper  v.  Cadwalader,  58,  61. 
Co-operative    B.    &    L.    Ass'n    v. 

State,  27. 
Coopersville  Co-op.  Creamery  Co. 

v.  Lemon,  27. 
Corke  v.  Fry,  36. 
Cross  v.  Long  Island  Loan  &  Trust 

Co.,  46. 

Crowell,  In  re,  65. 
Cunard  S.  S.  Co.  v.  Coulson,  101. 
Curry  v.  Charles  Warner  Co.,  33. 

D 

Daly,  Matter  of,  22. 
Darnell  v.  Indiana,  59. 
Delaware  &  H.  Canal  Co.  v.  Mahl- 

enbrock,  62. 
Doll  v.  Evans,  121. 
Dooley  v.  United  States,  130. 
Dorsheimer  v.  United  States,  124. 
Dowd  v.  Krall,  91. 
Drew  v.  Tifft,  24. 
Drexel  v.  Commonwealth,  22,  25. 
Dubuque    v.    Northwestern    Life 

Ins.  Co.,  2. 

Dunwoody  v.  United  States,  90. 
Dyer  v.  Melrose,  18. 


E 

Earp's  Appeal,  54,  55. 

Edinburgh  Southern  Cemetery  Co. 
v.  Kinmont,  81. 

Eidman  v.  Martinez,  29. 

Eley's  Appeal,  35,  46. 

Eliot  v.  Freeman,  71. 

Emery,  Bird,  Thayer  Realty  Co. 
v.  United  States,  5,  73,  130. 

English  Crown  Spelter  Co.  v.  Bak- 
er, 100. 

Erichsen  v.  Last,  61. 

Excelsior  Water  &  Min.  Co.  v. 
Pierce,  41. 


xii 


CASES   CITED 
[The  figures  refer  to  sections] 


F 


Fairchild  v.  Fail-child,  35. 
Farrell  v.  Sunderland  Steamship 

Co.,  63. 

Field  v.  Clark,  27. 
Finley  v.  Philadelphia,  18. 
Flint  v.  Stone  Tracy  Co.,  3,  8,  11, 

12,  13,  14,  16,  17,  19,  20,  26,  27, 

28,  62,  70,  113. 
Forbes     v.      Scottish      Provident 

Inst,  60. 

Forman  v.  Board  of  Assessors,  29. 
Foster  v.  Goddard,  89,  90,  92. 
Frank  Jones  Brewing  Co.  v.  Ap- 

thorpe,  60. 

Freedman  v.  Sigel,  18. 
Freeport  v.  Sidney,  35. 


Galm  v.  United  States,  18. 
Galveston,  H.  &  S.  A.  Ry.  Co.  v. 

Davidson,  4. 

Gehr  v.  Mont  Alto  Iron  Co.,  57. 
Gelsthorpe  v.  Furnell,  19. 
General  Accident,  etc.,  Co.  v.  Mc- 

Gowan,  105. 
Georgia  v.  Atkins,  77. 
Gerke  v.  Purcell,  81,  82. 
Gerry,  In  re,  47. 
Gibbons  v.  Mahon,  55. 
Gibson  v.  Cooke,  34. 
Gihon's  Estate,  In  re,  98. 
Gilbertson  v.  Ferguson,  59. 
GiUatt  v.  Colquhoun,  93. 
Glasgow  v.  Rowse,  7,  12. 
Glasgow   Corp.   Water  Com'rs  v. 

Miller,  77. 
Glasgow    Corp.    Waterworks,    In 

re,  77. 
Goodhart  v.  Pennsylvania  R.  Co., 

33. 

Goodwin  v.   Clark,  45. 
Graham's  Estate,  In  re,  46. 
Grainger  v.  Gough,  61. 
Grant  v.  Hartford  &  N.  H.  R.  Co., 

96. 
Gray  v.  Darlington,  46,  47. 


Gresham     Life    Assur.     Soc,     v. 

Bishop,   60. 
Grove  v.  Eliots,  60. 
Grove  v.   Young  Men's  Christian 

Ass'n,  72. 
Guest,  Keen  &  Nettlefolds,  Ltd.  v. 

Fowler,  89. 

H 

Hannon  v.  Williams,  69. 
Harbeck's  Will,  In  re,  29. 
Harvard  College  v.  Amory,  53. 
Hastings  v.  Herold,  130. 
Hastings  v.  Long,  81. 
Hebrew  Orphan  Asylum  v.   New 

York,  81. 

Heighe  v.  Littig,  44. 
Hennepin  County  v.  Brotherhood 

of  Gethsemane,  81. 
Hickok's  Estate,  In  re,  19. 
Highland  Ry.  Co.  v.  Balderstone, 

96. 

Hill  v.   Gregory,   35.  • 
Kite  v.  Kite,  54. 
Holmes  v.  Mitchell,  40. 
Hooper  v.  Bradford,  98. 
Hopkins'   Appeal,   22. 
Houston  &  T.  C.  R.  Co.  v.  Texas, 

17. 

Hubbard  v.  Brainard,  131. 
Hudson  v.  Gribble,  38. 
Huggins,  Ex  parte,  38. 
Humbird,  Ex  parte,  54. 
Huntington  v.    Savings  Bank,  69. 
Huttman,  In  re,  27,  109,  113. 
Hylton  v.  United  States,  5. 


Imperial    Continental    Gas   Ass'n 

v.  Nicholson,  59. 
Imperial  Fire  Ins.  Co.  v.  Wilson, 

105. 

Income  Tax  Com'rs  v.  Pemsel,  81. 
Ives,  Ex  parte,  55. 


Jackson   v.    Northern    Cent.    Ry. 
Co.,  61. 


CASES  CITED 
[The  figures  refer  to  sections] 


Xlll 


Jennery  v.   Olmstead,  47. 

John    T.    Sesnon    Co.    v.    United 

States,  29. 
Jones,  In  re,  71. 
Joseph   Hargreaves,   Ltd.,    In  re, 

113. 

K 

Kane  v.  Schuylkill  Fire  Ins.  Co., 

89. 

Keniiard  v.  Manchester,  22. 
Kimberley's  Estate,  In  re,  29. 
King  v.  Hunter,  18. 
King  v.  Loxdale,  30. 
Kingston  v.   Canada   Life  Assur. 

Co.,  32. 

Knowles  v.  McAdarn,  39,  41,  102. 
Knowlton  v.  Moore,  19,  24. 
Kodak  Limited  v.  Clark,  60. 
Kossakowski  v.   People,   71. 


Lamar  Water  &  El.  Co.  v.  Lam- 
ar,  32. 

Lane  v.   Albertson,  71. 

Last  v.  London  Assur.  Corp.,  63, 
75. 

Lauman  v.  Foster,  55,  56. 

Lawless  v.  Sullivan,  32. 

Lee  v.  Neuchatel  Asphlate  Co., 
41. 

Leith,  Hull  &  Hamburg  Steam 
Packet  Co.  v.  Inland  Revenue, 
101. 

Leloup  v.  Port  of  Mobile,  17. 

Leprohon  v.  Ottawa,  64. 

Levi  v.  City  of  Louisville,  L 

Lindley's  Appeal,   35. 

Linsley  v.  Bogert,  47. 

Lining  v.  Charleston,  29. 

Liverpool  Ins.  Co.  v.  Massachu- 
setts, 68. 

Liverpool,  L.  &  G.  Ins.  Co.  v.  Ben- 
nett, 60. 

Lloyd  v.  Sulley,  58. 

Lockwood  v.  District  of  Colum- 
bia, 30. 


London  Bank  of  Mexico  v.  Ap- 
thorpe,  60. 

London  County  Council  v.  Attor- 
ney General,  125. 

London  County  Council  v.  Ed- 
wards, 101. 

Lord  v.  Brooks,  53. 

Lord  Advocate  v.   McLaren,   121. 

Lothian  v.  Macrae,  90. 

Lott  v.  Hubbard,  22,  86,  115. 

Lowry  v.  Farmers'  L.  &  T.  Co., 
54. 

Lyon  v.  Denison,  71. 

M 

Mackey  v.  Miller,  33. 

McClintock  v.  Dana,  35. 

McCoach  v.  Minehill  &  S.  H.  Ry. 
Co.,  73. 

McCulloch  v.  Maryland,  16. 

McDougall   v.    Sutherland,   36. 

Magee  v.  Denton,  53,  129,  131. 

Magoun  v.  Illinois  Trust  &  Sav. 
Bank,  13,  19. 

Manchester  v.  McAdam,  82. 

Mandell  v.  Pierce,  66. 

Marquette,  H.  &  O.  R.  Co.  v.  Unit- 
ed States,  55. 

Massachusetts  Society  v.  Boston, 
81. 

Mayer  v.  Nethersole,  33. 

Memphis  v.  Ensley,  22. 

Mercantile  Library  Co.  v.  Phila- 
delphia, 82. 

Mersey  Docks  &  Harbour  Board 
v.  Lucas,  33,  97. 

Mersey  Loan  &  Discount  Co.  v. 
Wootton,  97. 

Michigan  Cent.  R.  Co.  v.  Collector, 
16,  61. 

Michigan  Cent.  R.  Co.  v.  Powers, 
13. 

Millar  v.  Douglass,  42. 

Mills  v.  Britton,  55. 

Minehill  &  S.  H.  Ry.  Co.  v.  Mc- 
Coach, 73. 

Minot  v.  Paine,  54. 

Minot  v.    Winthrop,  19. 


XIV 


CASES   CITED 


[The  figures  refer  to  sections] 


Missouri,  K.  &  T.  Ry.  Co.  v.  Mey- 
er, 29,  41. 

Mixter's  Estate,  In  re,  19. 

Moore  v.  Miller,  19,  61. 

Moorhead  v.  Seymour,  68. 

Morton's  Ex'rs  v.  Morton's  Ex'r, 
32. 

Moss'  Appeal,  54,  56. 

Mosse  v.   Salt,  125. 

Mundy  v.  Van  Hoose,  32,  33. 

Murphy,  In  re,  33. 

Mutual  Benefit  Life  Ins.  Co.  v. 
Herold,  29,  48,  75,  89. 

N 

Needham  v.  Bowers,  81. 
New  England  Trust  Co.  v.  Eaton, 

103. 

New  Orleans  v.  Fassman,  22,  32. 
New  Orleans  v.  Fourchy,  19,  86. 
New  Orleans  v.  Hart,  32. 
New  Orleans  v.  Lea,  18. 
New  York  Life  Ins.  Co.  v.  Styles, 

75. 
Nobel  Dynamite  Trust  Co.  v.  Wy- 

att,  60. 

Norris  v.  Commonwealth,  45. 
Norwich   Union  Fire  Ins.   Co.  v. 

Magee,  60. 

Northumberland  v.  Chapman,  18. 
Nunnemacher  v.   State,  7. 


Odell  v.  City  of  Atlanta,  62. 

Opinion  of  Justices,  32. 

Osborn  v.  Bank  of  United  States, 

16. 

Ould  v.  Richmond,  3. 
Overall  v.  Bezeau,  45. 


Pacific  B.  &  L.  Ass'n  v.  Hartson, 

83. 

Pacific  Ins.  Co.  v.  Soule,  5. 
Paddington      Burial      Board      v. 

Com'rs  of  Inland  Revenue,  81. 
Paisley  Cemetery  Co.  v.  Reith,  81. 


Park's  Estate,  In  re,  46. 

Parker  v.  Mason,  54. 

Parker  v.  North  British  Ins.  Co., 

4,  20. 

Parkhurst  v.  Brock,  62. 
Parkview  B.  &  L.  Ass'n  v.  Herold, 

29,  83. 

Partridge  v.  Mallandaine,  37. 
Peacock  y.  Pratt,  13,   18,  19,   20, 

27,  82. 

Pearson  v.  Chace,  32. 

Pennsylvania  Steel  Co.  v.  New 
York  City  Ry.  Co.,  29,  65. 

People  v.  Com'rs  of  Taxes,  62. 

People  v.  Davenport,  97,  103. 

People  v.  Koenig,  29. 

People  v.  Niagara  County  Sup'rs, 
32,  33. 

People  v.  Purdy,  40. 

People  v.  Roberts,  41,  43. 

People  v.  San  Francisco  Sav. 
Union,  33,  48. 

People  v.  Sup'rs  of  New  York,  32. 

Perotz's  Appeal,  35. 

Philadelphia  v.  Pennsylvania  Hos- 
pital, 81. 

Philadelphia  &  S.  S.  Co.  v.  Penn- 
sylvania, 17. 

Philadelphia  Library  Co.  v.  Don- 
ohugh,  82. 

Plumer  v.  Commonwealth,  64. 

Plummer  v.  Cole,  17. 

Poland  v.  Lamoille  Valley  R.  Co., 
32,  89. 

Pollock  v.  Farmers'  Loan  &  Trust 
Co.,  1,  3,  5,  6,  17,  18,  19,  20,  22, 

28,  129. 

Powers  v.  Barney,  29. 

Proctor,  In  re,  47. 

Providence  Rubber  Co.  v.  Good- 
year, 33. 

Pritchett  v.  Nashville  Trust  Co., 
54. 

Purnell  v.  Page,  18. 


Railroad  Co.  v.  Collector,  61. 
Reed  v.  Head,  53. 


CASES  CITED 
[The  figures  refer  to  sections] 


XV 


Reid's  Brewery  Co.  v.  Male,  100. 
Remington  v.  Field,  32,  40. 
Revell    v.    Elworthy    Bros.,    Ltd., 

91. 

Reynolds  v.  Hanna,  35. 
Reynolds  v.  Williams,  34. 
Rhymney  Iron  Co.  v.  Fowler,  41, 

89. 

Rice  v.  United  States,  29. 
Richardson  v.  State,  91. 
Robertson  v.  Pratt,  14,  15,  18,  19, 

40,  88,  110. 

Robson  v.  Regina,  29,  64. 
Rogers,  In  re,  44. 
Rogers  v.  Inland  Revenue,  58. 


St   Andrew's  Hospital   r.    Shear- 
smith,  81. 

Salem  Lyceum  v.  Salem,  82. 
Salt  Lake   City  v.   Hollister,   43, 

77. 

San  Paulo  Ry.  Co.  v.  Carter,  60. 
Sandford  v.  Sup'rs  of  New  York, 

71. 

Saunders  v.  Russell,  45. 
Savings  Bank  v.  New  London,  69. 
Scofield  v.  Moore,  89. 
Scottish  Inv.  Trust  Co.  v.  Forbes, 

46. 
Scottish  Mortgage  Co.  v.  McKel- 

vie,  59. 
Scottish  Provident  Inst.  v.  Allen, 

60. 
Scottish   Union  &  N.  Ins.   Co.  v. 

Smiles,  63. 

Shoemaker's  Appeal,  35. 
Sims'  Appeal,  32. 
Sioux  City  &  P.  R.  Co.  v.  United 

States,  33. 
Slocum,  In  re,  44. 
Smith  v.  Eastern  R.  Co..  95. 
Smith  v.  Hooper,  46,  55. 
Smith  v.  New  York,  18. 
Smith  v.  Westinghouse  Brake  Co., 

89. 


Society  of  Writers  to  the  Signet 

v.  Inland  Revenue,  92. 
Soehlein  v.  Soehlein,  54. 
Sohier   v.   Eldredge,   35. 
South  Carolina  v.  United  States, 

70,  77. 

Southern  Ry.  Co.  v.  McNeill,  30. 
Southwell    v.    Savill    Bros.,    Ltd., 

89. 

Sowards  v.  Taylor,  32. 
Spooner  v.  Phillips,  55. 
Spreckels  Sugar  Ref.  Co.  v.  Mc- 

Clain,  16,  29. 

Springer  v.  United  States,  5. 
Standard  Life  Assur.  Co.  v.  Allan, 

60. 
Stanley  v.  Gramophone,  etc.,  Ltd., 

60. 

State  v.  Academy  of  Sciences,  81. 
State  v.  Alston,  19. 
State  v.  Barnes.,  45. 
State  v.  Bazille,  19,  24,  29. 
State  v.  Bell,  18,  25. 
State  v.  Board  of  Assessors,  81. 
State  v.  Farmers'    &    Mechanics' 

Mut  Aid  Ass'n,  80. 
State  v.  Ferris,  19. 
State  v.  Frear,   7,   9,   10,  13,    14, 

15,  18,  19,  21,  22,  23,  24,  25,  27, 

36,  129. 

State  v.  Guilbert,  19. 
State  v.  Lincoln    Sav.    Bank,    84. 
State  v.  McCarty,  34. 
State  v.  United  States  Fidelity  & 

Guaranty  Co.,  17. 
State  v.  Vance,  19. 
State  v.  Worth,  62. 
State  Tax  on  Foreign  Held  Bonds, 

17.. 
Stevens  v.  Durban-Roodepoort  G. 

M.  Co.,  22,  41,  98. 
Stockdale  v.  Insurance  Co.'s,  25. 
Stratton's  Independence  v.  How- 

bert,  102. 

Straus  v.  Abrast  Realty  Co.,  129. 
Strong,  In  re,  38. 
Strong  &  Co.  v.  Woodifield,  95,  99. 
Sun  Insurance  Office  v.  Clark,  105. 


XVI 


CASES   CITED 
[The  figures  refer  to  sections] 


Taxation  of  Salaries  of  Judges,  In 

re,  18. 

Taylor  v.  Harwell,  33. 
Tebrau      Rubber      Syndicate      v. 

Farmer,  45,  46. 
Tenant  v.  Smith,  32,  36. 
Texas   Land  &   Mortgage  Co.  v. 

Holtham,  97. 
Thomson's  Appeal,  35.. 
Thomson's  Estate,  In  re,  47,  53, 

56,  57. 

Thorn  v.  De  Breteuil,  32,  33. 
Tischler  v.  Apthorpe,  61. 
Treat  v.  Farmers'  Loan  &  Trust 

Co.,  130. 

Tubb   v.  Fowler,   55. 
Turner  v.  Cuxon,  38. 
Turner  v.  Rickman,  61. 
Turton  v.  Cooper,  38. 

u 

Union     Bridge     Co.     v.     United 

States,  27. 

Union  County  v.  James,  64. 
Union  Pac.  R.  Co.  v.  Peniston,  16. 
United   States   v.    Acorn   Roofing 

Co.,  107. 
United  States  v.  Baltimore  &  O. 

R.  Co.,  16,  17,  77. 
United  States  v.  Barnes,  130. 
United    States    v.    Central    Nat. 

Bank,  99. 

United  States  v.  Collier,  30. 
United  States  v.  Erie  R.  Co.,  16. 
United  States  v.   Finch,   130. 
United  States  v.  Frost,  48. 
United  States  v.   General  Inspec- 
tion &  Loading  Co.,  66,  120. 
United  States  v.    Indianapolis   & 

St.  L.  R.  Co.,  48. 
United  States  v.  Mayer,  100. 
United  States     v.  Military  Const. 

Co.,  107. 
United  States  v.  Nipissing  Mines 

Co.,  41,  101,  102. 
United  States  v.  Ritchie.  18. 
United  States  v.  Schillinger,  48. 


United  States  v.    Smith,    30,    46, 

109. 

United  States  v.  Watts,  29. 
United  States  v.      Wigglesworth, 

29. 
Universal    Life    Assur.     Soc.     v. 

Bishop,  60. 

V 

Vassar,  Matter  of  Will  of,  29. 
Vedder,  In  re,  47. 
Vernon  v.  Manhattan  Co.,  45. 
Vicksburg  &  M.  R.  Co.  v.   State, 

29. 
Vinton's  Appeal,  57. 

W 

Walker  v.  Brisley,  115. 

Waring  v.  Savannah,  2,  12. 

Ward,  In  re,  37. 

Warren,  In  re,  53. 

Watchmakers'  Alliance,  In  re, 
125. 

Watney  v.  Musgrave,   93. 

Weaver  v.  Ewers,  131. 

Webb  v.  Outriin,  64. 

Wells  v.  Shook,  32. 

Wentz's  Appeal,  35. 

Werle  &  Co.  v.  Colquhoun,  61. 

White  v.  Koehler,  37. 

Wilcox  v.  Middlesex  County 
Com'rs,  22,  32,  42. 

Wilmerding's   Estate,    In   re,    19. 

Wiltbank's  Appeal,  56. 

Wingate  v.  Webber,  61. 

Woodburn's  Estate,  In  re,  41. 

Woodruff  v.  Oswego  Starch  Fac- 
tory, 22. 

Worts  v.  Worts,  55. 


Ystradyfodwg  &  Pontypridd  Main 
Sewerage  Board  v.  Bensted,  77. 
Young,  In  re,  58. 


Zonne   v.   Minneapolis   Syndicate. 
73. 


INCOME  TAXATION 


CHAPTER  I 
NATURE  OF  INCOME  TAXES 

|  1.     Definitions  and  General  Considerations. 

2.  Property  Taxes  Distinguished. 

3.  Excise,   Franchise,  License,  and  Occupation   Taxes   Distin- 

guished. 

4.  Tax  on  Gross  Receipts. 

5.  Income  Tax  as  Direct  Tax, 

§  1.     Definitions  and  General  Considerations 

An  income  tax  is  distinguished  from  other  forms  of  taxa- 
tion in  this  respect,  that  it  is  not  levied  upon  property,  nor 
upon  the  operations  of  trade  and  business  or  the  subjects  em- 
ployed therein,  nor  upon  the  practice  of  a  profession  or  the 
pursuit  of  a  trade  or  calling,  but  upon  the  acquisitions  of  the 
taxpayer  arising  from  one  or  more  of  these  sources  or  from 
all  combined,  annually  or  at  other  stated  intervals,  and  gen- 
erally, but  not  necessarily,  only  upon  the  excess  of  such  ac- 
quisitions over  a  certain  minimum  sum.  It  is  not  a  tax  upon 
accumulated  wealth,  but  upon  its  periodical  accretions.  It 
is  not  a  tax  upon  personal  exertion  for  gain,  whether  com- 
bined with  the  employment  of  capital  or  not,  but  upon  the 
fruits  thereof.  An  income  tax  is  in  effect  a  tax  upon  earn- 
ings, taking  that  term  in  its  broadest  sense,  and  irrespective  of 
the  question  whether  the  person  whose  income  is  taxed  has 
actively  earned  it  or  has  merely  profited  by  loaning  his  cap- 
ital for  active  employment  by  another.1  The  definition  of 

i  "There  is  no  tax  which,  in  its  essence,  is  more  just  and  equitable 
than  an  income  tax,  if  the  statute  imposing  it  allows  only  such  ex- 
emptions as  are  demanded  by  public  considerations  and  are  consist- 

BL.INC.TAX.— 1 


§  2  INCOME   TAXATION  (Ch.  1 

an  income  tax  as  one  which  relates  to  the  product  or  income 
from  property  or  from  business  pursuits,2  is  sufficient  for  the 
purposes  of  a  practical  description,  but  is  not  scientifically 
accurate,  since  the  term  "income"  may  include  acquisitions 
from  other  sources  than  those  mentioned.  For  instance,  mon- 
ey coming  to  one  by  gift  or  bequest  is  undoubtedly  "income," 
though  it  is  in  the  discretion  of  the  taxing  power  to  include  it 
within  the  incidence  of  the  tax  or  to  exempt  it.  In  the  sense 
that  it  is  imposed  upon  a  limited  and  selected  subject  of  tax- 
ation, an  income  tax  may  also  be  regarded  as  a  special  tax,, 
rather  than  a  general  tax.  Thus,  in  South  Carolina,  a  gen- 
eral taxing  act  enacted  in  1905  required  the  county  auditors 
and  treasurers  to  collect  the  taxes  levied  under  its  provisions,, 
and  forbade  them  to  collect  any  other  tax  except  such  "special 
tax"  as  might  be  authorized  under  an  act  or  joint  resolution 
of  the  legislature.  It  was  contended  that  this  operated  as  a 
repeal  of  the  income  tax  law  of  1897.  But  the  courts  held 
otherwise,  declaring  that  the  income  tax  was  a  "special  tax'* 
within  the  meaning  of  the  general  statute.8 

§  2.     Property  Taxes  Distinguished 

A  tax  on  incomes  is  not  a  tax  on  property,  -and  a  tax  on 
property  does  not  embrace  incomes.  Hence  a  municipal  cor- 
poration which  has  authority  by  its  charter  to  levy  taxes  for 
its  own  purposes  on  all  "taxable  property"  does  not  possess 

ent  wi-th  the  recognized  principles  of  the  equality  of  all  persons  be- 
fore the  law,  and,  while  providing  for  its  collection  in  ways  that  do 
not  unnecessarily  irritate  and  annoy  the  taxpayer,  reaches  the  earn- 
ings of  the  entire  property  of  the  country,  except  governmental  prop- 
erty and  agencies,  and  compels  those,  whether  individuals  or  corpo- 
rations, who  receive  such  earnings,  to  contribute  therefrom  a  reason- 
able amount  for  the  support  of  the  common  government  of  all." 
Dissenting  opinion  of  Harlan,  J.,  in  Pollock  v.  Farmers'  Loan  & 
Trust  Co.,  158  U.  S.  601,  15  Sup.  Ct.  912,  39  L.  Ed.  1108. 

2  Levi  v.  City  of  Louisville,  97  Ky.  394,  30  S.  W.  973,  28  L.  R.  A. 
480. 

s  Alderman  v.  Wells,  85  S.  C.  507,  67  S.  E.  781,  21  Am.  &  Eng. 
Ann.  Cas.  193,  27  L.  R.  A.  (N.  S.)  864. 

(2) 


Ch.  1)  NATURE   OF  INCOME  TAXES  §  3 

the  authority  to  lay  a  tax  on  incomes.*  For  the  same  reason 
a  tax  laid  on  income  is  different  from  a  tax  laid  on  the  prop- 
erty out  of  which  the  income  arises,  and  although  a  statute 
may  tax  land  at  a  different  rate  from  that  imposed  on  incomes, 
it  is  not  therefore  in  conflict  with  a  constitutional  provision 
requiring  that  taxation  on  all  species  of  property  shall  be  uni- 
form. As  remarked  by  the  Supreme  Court  of  Georgia: 
"Gross  earnings  and  interest  coming  in  from  any  source, 
labor,  capital,  investment  of  any  sort,  or  money  loaned,  are 
not  property  in  the  sense  of  the  constitution,  but  are  merely 
income.  Certainly  the  gross  earnings  of  a  laboring  man  are 
nothing  but  his  income.  So  it  would  seem  the  earnings  of  a 
salaried  officer  are  income,  and  so  the  income  from  capital 
employed  in  a  bank  or  railroad  or  manufacture  would  seem 
to  be  income  only.  The  net  income  after  the  expenses  are 
paid  becomes  property,  when  invested,  or  if  it  be  money  lying 
in  a  bank  or  locked  up  at  home.  The  fact  is,  property  is  a 
tree,  income  is  the  fruit;  labor  is  a  tree,  income  the  fruit; 
capital  a  tree,  income  the  fruit.  The  fruit,  if  not  consumed 
as  fast  as  it  ripens,  will  germinate  from  the  seed  which  it  in- 
closes, and  will  produce  other  trees,  and  grow  into  more  prop- 
erty ;  but  so  long  as  it  is  fruit  merely,  and  plucked  to  eat  and 
consumed  in  the  eating,  it  is  no  tree  and  will  produce  itself  no 
fruit."  6 

§  3.     Excise,    Franchise,    License   and   Occupation   Taxes 

Distinguished 

License  and  occupation  taxes,  which  are  payable  in  re- 
spect to  the  privilege  of  engaging  in  or  carrying  on  a  par- 
ticular business  or  vocation,  are  not  income  taxes,  notwith- 
standing the  fact  that  the  amount  of  tax  payable  by  any  in- 
dividual may  be  measured  by  the  amount  of  business  which 
he  transacts  or  his  earnings  therefrom.  And  conversely, 

*  City  of  Dubuque  v.  Northwestern  Life  Ins.  Co.,  29  Iowa,  9. 
B  Waring  v.  City  of  Savannah,  60  Ga.  93. 

(3) 


§  3  INCOME    TAXATION  (Ch.  1 

although  a  person's  entire  income  may  be  derived  from  a 
particular  pursuit  or  trade,  a  tax  on  the  income  as  such  is 
not  a  license  or  privilege  tax.  Thus,  a  tax  on  sales  of  a 
particular  commodity,  or  a  tax  on  the  dealer  measured  by 
the  amount  of  his  sales,  is  not  an  income  tax.6  So,  in  Vir- 
ginia, it  appeared  that  a  city  ordinance  provided  that  law- 
yers and  others  should  be  divided  into  six  classes,  and  that 
those  in  each  class  should  pay  a  certain  sum  as  a  tax.  The 
committee  on  finance  was  to  place  each  attorney  in  the  class 
to  which  he  properly  belonged,  looking  to  all  the  circum- 
stances. After  the  committee  had  completed  their  classifi- 
cation, public  notice  was  to  be  given,  and  any  lawyer  dissatis- 
fied with  his  classification  was  to  appear  before  the  commit- 
tee and  have  it  corrected  if  erroneous.  It  was  held  that  this 
was  not  an  income  tax,  and  the  ordinance  was  valid.7  Hence 
it  appears  that  a  person  carrying  on  a  certain  business,  as, 
for  instance,  a  dealer  in  intoxicating  liquors,  may  be  sub- 
jected to  a  license  tax  for  the  privilege  of  pursuing  that 
avocation,  to  a  state  or  municipal  tax  for  general  purposes 
upon  his  stock  in  trade,  and  to  a  tax  upon  the  income  de- 
rived from  his  business,  and  yet,  as  all  these  taxes  relate  to 
different  subjects  and  do  not  overlap  or  conflict,  their  im- 
position affords  no  legal  ground  for  complaint. 

Excise  taxes  include  license  fees  and  also  some  other  forms 
of  taxation,  and  these  also  are  theoretically  distinguishable 
from  income  taxes,  although  the  practical  difference  is  very 
slight  in  cases  where  the  excise  is  measured  by  the  income. 
And  indeed  it  has  sometimes  been  thought  that  an  income 
tax  should  be  classed  as  an  excise  tax,  within  the  meaning 
of  the  federal  Constitution.  In  the  decision  which  over- 
threw the  federal  income  tax  law  of  1894,  one  of  the  judges 
remarked:  "Excises  are  a  species  of  tax  consisting  gen- 

«  Commonwealth  v.  Brown,  91  Va.  762,  21  S.  E.  357,  28  L.  R.  A. 
110. 

i  Quid  v.  City  of  Richmond,  23  Gratt  (Va.)  464,  14  Am.  Rep.  139. 


Ch.  1)  NATURE   OF   INCOME   TAXES  §  3 

erally  of  duties  laid  upon  the  manufacture,  sale,  or  consump- 
tion of  commodities  within  the  country,  or  upon  certain 
callings  or  occupations,  often  taking  the  form  of  exactions 
for  licenses  to  pursue  them.  The  taxes  created  by  the  law 
wider  consideration,  as  applied  to  savings  banks,  insurance 
companies,  whether  of  fire,  life,  or  marine,  to  building  or 
other  associations,  or  to  the  conduct  of  any  other  kind  of 
business,  are  excise  taxes,  and  fall  within  the  requirement, 
so  far  as  they  are  laid  by  Congress,  that  they  must  be  uni- 
form throughout  the  United  States."  8 

But  a  franchise  tax  upon  corporations  is  not  an  income 
tax,  though  it  may  be  called  an  excise  tax.  And  this  is  so 
whether  the  tax  is  laid  by  the  state  under  whose  laws  the 
corporation  is  organized,  and  is  exacted  annually  for  the 
privilege  of  continuing  its  corporate  existence,  or  is  imposed 
by  a  different  state  for  the  privilege  of  doing  business  with- 
in its  limits,  or  is  imposed  by  an  outside  power,  such  as  the 
United  States,  upon  the  franchise  of  transacting  business  in 
a  corporate  capacity.  For  this  reason  the  tax  on  corpora- 
tions imposed  by  the  act  of  Congress  of  August  5,  1909,  be- 
ing laid  specifically  upon  the  carrying  on  or  doing  of  busi- 
ness in  a  corporate  or  quasi  corporate  capacity,  was  ad- 
judged not  to  be  an  income  tax,  although  the  amount  of 
the  tax  in  each  instance  was  measured  by  the  net  annual  in- 
come of  the  corporation,  but  an  excise  tax,  and  therefore 
not  a  direct  tax,  and  therefore  not  invalid  because  not  ap- 
portioned among  the  several  states  according  to  popula- 
tion.8 Practically  it  makes  but  little  difference  to  a  corpo- 
ration whether  it  is  taxed  upon  its  income  or  upon  the  value 
of  its  corporate  privileges  as  measured  by  its  income.  But 
the  theoretical  distinction  is  valid,  and  its  actual  importance 

s  Per  Field,  J.,  concurring,  in  Pollock  v.  Farmers'  Loan  &  Trust 
Co.,  157  U.  S.  429,  15  Sup.  Ct.  673,  39  L.  Ed.  759. 

"  Flint  v.  Stone  Tracy  Co.,  220  U.  S.  107,  31  Sup.  Ct  342,  55  L.  Ed. 
389. 

(5) 


§  4  INCOME   TAXATION  (Ch.  1 

is  shown  by  the  fact  that  it  was  this  distinction  alone  which 
ultimately  saved  the  act  of  Congress  of  1909  from  the  fate 
which  befell  that  of  1894. 

§  4.     Tax  on  Gross  Receipts 

In  numerous  states  at  the  present  time,  various  kinds  of 
corporations  and  particularly  railroad  companies  are  not 
taxed  directly  upon  their  real  and  personal  property,  but 
upon  their  gross  receipts.  Whether  or  not  a  tax  of  this 
kind  is  to  be  regarded  as  an  income  tax  is  an  unsettled  ques- 
tion. It  has  been  held  in  Louisiana  that  the  term  "income 
tax"  includes  a  tax  upon  the  gross  receipts  of  a  corporation 
or  business.10  But  there  is  a  contrary  decision  in  Texas.11 
Certainly  such  a  tax  is  not  a  general  income  tax,  being  re- 
stricted to  corporations  as  distinguished  from  individuals,  or 
even  to  certain  classes  of  corporations.  And  it  may  clearly 
be  regarded  in  the  light  of  an  excise  tax,  the  subject  of  tax- 
ation being  the  transaction  of  business  in  a  corporate  capac- 
ity, and  the  receipts  of  the  company  serving  only  to  measure 
the  tax.  Or  perhaps,  having  regard  to  the  use  of  this  form 
of  taxation  as  the  sole  means  of  assessing  corporations,  it 
may  be  considerd  as  in  reality  a  tax  on  their  property  hold- 
ings, rather  than  an  income  tax,  the  amount  being  measured 
not  so  much  by  the  market  value  of  the  property  as  by  its 
profitableness,  and  its  degree  of  profitableness  being  ascer- 
tained from  the  amount  of  the  gross  earnings. 

§  5.     Income  Tax  as  Direct  Tax 

In  general  usage,  and  according  to  the  terminology  of 
political  economy,  a  direct  tax  is  one  demanded  of  the  per- 
son who  is  expected  to  pay  it  and  bear  the  expense  of  it 
without  recoupment,  while  an  indirect  tax  is  demanded  from 
one  person  in  the  expectation  that  he  will  indemnify  him- 

10  Parker  v.  North  British  Ins.  Co.,  42  La.  Ann.  428,  7  South.  59f> 

11  Galveston,  H.  &  S.  A.  Ry.  Co.  v.  Davidson  (Tex.  Civ.  App.)  93 
S.  W.  436. 

(6) 


Ch.  1)  NATURE   OF  INCOME  TAXES  §  5 

self  at  the  expense  of  others.12  When  the  question  of  the 
difference  between  direct  and  indirect  taxes  first  came  be- 
fore the  Supreme  Court  of  the  United  States,  in  connection 
with  the  constitutional  provision  that  "representatives  and 
direct  taxes  shall  be  apportioned  among  the  several  states," 
it  was  held  that  the  term  "direct,"  as  here  used,  was  to  be 
taken  in  a  narrower  sense  than  that  above  indicated;  and  it 
was  ruled  that  only  two  classes  of  taxes  could  be  considered 
as  coming  under  this  designation,  namely,  taxes  on  land  and 
capitation  taxes.18  But  these  decisions  have  been  overruled, 
and  it  is  now  held  that  income  taxes,  whether  levied  on  the 
issues  and  profits  of  real  estate  or  on  the  gains  and  interest 
from  personal  property,  are  also  direct  taxes  within  the 
meaning  of  the  constitution.14  The  celebrated  case  in  which 
this  decision  was  made  was  twice  before  the  Supreme  Court, 
and  in  the  course  of  the  opinion  filed  on  the  second  hearing 
it  was  said:  "Our  previous  decision  was  confined  to  the 
consideration  of  the  validity  of  the  tax  on  the  income  from 
real  estate,  and  on  the  income  from  municipal  bonds.  The 
question  thus  limited  was  whether  such  taxation  was  direct 
or  not  in  the  meaning  of  the  Constitution;  and  the  court 
went  no  further,  as  to  the  tax  on  the  income  from  real  es- 
tate, than  to  hold  that  it  fell  within  the  same  class  as  the 
source  whence  the  income  was  derived, — that  is,  that  a  tax 
upon  the  realty  and  a  tax  upon  the  receipts  therefrom  were 
alike  direct;  while,  as  to  the  income  from  municipal  bonds, 
that  could  not  be  taxed  because  of  want  of  power  to  tax 
the  source,  and  no  reference  was  made  to  the  nature  of  the 

12  Brewers'  Ass'n  v.  Attorney  General  [1897]  App.  Cas.  231;  Black, 
Constitutional  Law  (3d  edn.)  p.  209. 

is  Springer  v.  United  States,  102  U.  S.  586,  26  L.  Ed.  253;  Pacific 
Ins.  Co.  v.  Soule,  7  Wall.  433,  19  L.  Ed.  95 ;  Hylton  v.  United  States, 
3  Ball.  171,  1  L.  Ed.  556. 

i*  Pollock  v.  Farmers'  Loan  &  Trust  Co.,  157  U.  S.  429,  15  Sup.  Ct. 
673,  39  L.  Ed.  759.  And  see  Emery,  Bird,  Thayer  Realty  Co.  v. 
United  States,  198  Fed.  242. 

(7) 


§  5  INCOME   TAXATION  (Ch.  1 

tax,  as  being  direct  or  indirect.  We  are  now  permitted  to 
broaden  the  field  of  inquiry,  and  to  determine  to  which  of 
the  two  great  classes  a  tax  upon  a  person's  entire  income — 
whether  derived  from  rents  or  products,  or  otherwise,  of 
real  estate,  or  from  bonds,  stocks,  or  other  forms  of  per- 
sonal property — belongs,  and  we  are  unable  to  conclude  that 
the  enforced  subtraction  from  the  yield  of  all  the  owner's 
real  or  personal  property,  in  the  manner  prescribed,  is  so 
different  from  a  tax  upon  the  property  itself  that  it  is  not 
a  direct,  but  an  indirect,  tax  in  the  meaning  of  the  Constitu- 
tion." 15  For  this  reason,  and  by  this  decision,  the  income 
tax  law  of  1894  was  pronounced  unconstitutional.  Since 
that  time  the  Sixteenth  Amendment  to  the  Constitution  has 
been  adopted.  But  that  amendment  does  not  purport  to  de- 
clare that  an  income  tax  shall  not  be  a  direct  tax.  It  only 
dispenses  with  the  necessity  of  apportionment  among  the 
several  states,  so  far  as  concerns  a  tax  on  incomes  from 
whatever  source  derived.  The  decision  of  the  Supreme 
Court  above  referred  to  has  never  been  overruled,  and  it 
remains  an  authoritative  declaration  that  a  tax  upon  incomes 
is  as  much  a  direct  tax  as  one  laid  upon  land  or  personal 
property. 

10  Pollock  v.  Farmers'  Loan  &  Trust  Co.,  158  U.  S.  601,  15  Sup. 
Ct.  912,  39  L.  Ed.  1108. 

(8) 


Ch.  2)        CONSTITUTIONAL  AND  STATUTORY    PROVISIONS        §  6 

CHAPTER  II 
CONSTITUTIONAL  AND  STATUTORY  PROVISIONS 

§  6.  Provisions  of  United  States  Constitution. 

7.  Provisions  of  State  Constitutions. 

8.  History  of  Income  Tax  Laws. 

9.  Income  Tax  Laws  in  Force. 

10.    Economic  Aspects  of  Income  Taxation. 

§  6.     Provisions  of  United  States  Constitution 

As  originally  adopted  the  Constitution  of  the  United  States 
contained  the  following  provisions  with  reference  to  national 
taxation:  "Representatives  and  direct  taxes  shall  be  appor- 
tioned among  the  several  states  which  may  be  included  within 
this  Union,  according  to  their  respective  numbers"  (Art.  1,  § 
2.)  "The  Congress  shall  have  power  to  lay  and  collect  taxes, 
duties,  imposts,  and  excises,  to  pay  the  debts  and  provide  for 
the  common  defense  and  general  welfare  of  the  United  States ; 
but  all  duties,  imposts,  and  excises  shall  be  uniform  through- 
out the  United  States"  (Art.  1,  §  8.)  "No  capitation  or  other 
direct  tax  shall  be  laid  unless  in  proportion  to  the  census  or 
enumeration  herein  before  directed  to  be  taken."  (Art.  1,  § 
9.)  During  the  period  of  the  Civil  War  and  for  some  time 
thereafter,  that  is,  between  the  years  1861  and  1870,  succes- 
sive acts  of  Congress  imposed  general  taxation  upon  incomes 
derived  from  all  sources,  for  the  support  of  the  federal  gov- 
ernment, without  any  attempt  at  apportionment  among  the 
states.  But  it  was  held  by  the  courts  that  an  income  tax  is  not 
a  direct  tax  and  therefore  does  not  require  such  apportion- 
ment, while  the  question  of  the  "uniformity"  of  such  acts  un- 
der the  constitutional  provision  above  quoted  does  not  appear 
to  have  been  raised.  But  a  similar  statute  enacted  in  1894  was 
adjudged  unconstitutional,  in  so  far  as  it  applied  to  incomes 
derived  from  the  renting  of  real  property  or  from  the  invest- 
ment of  personal  property,  for  lack  of  apportionment,  the 

(9) 


$  6  INCOME   TAXATION  (Ch.  2 

court  now  holding  it  to  be  a  direct  tax,  and  invalid  so  far  as 
it  applied  to  income  derived  from  state  or  municipal  bonds,  on 
the  ground  that  Congress  had  no  rightful  power  to  tax  those 
subjects.1  In  so  deciding,  the  Supreme  Court  advanced  the 
suggestion  that  if  the  "ultimate  sovereignty"  desired  to  intrust 
to  Congress  a  general  power  to  tax  incomes,  it  could  be  done 
by  an  amendment  to  the  Constitution.  Thereafter  a  consti- 
tutional amendment  was  proposed  by  act  of  Congress,  sub- 
mitted to  the  legislatures  of  the  several  states,  ratified  by  the 
necessary  majority,  and  proclaimed  in  1913  as  the  Sixteenth 
Amendment.  It  is  as  follows :  "The  Congress  shall  have  pow- 
er to  lay  and  collect  taxes  on  incomes,  from  whatever  source 
derived,  without  apportionment  among  the  several  states,  and 
without  regard  to  any  census  or  enumeration." 

Is  this  amendment  a  grant  of  power  or  only  the  removal 
of  a  constitutional  restriction?  From  the  use  of  the  words 
"from  whatever  source  derived"  it  might  be  argued  that  it  was 
the  intention  to  bring  within  the  taxing  power  of  Congress 
certain  subjects  not  previously  included,  such  as  income  de- 
rived from  the  bonded  debt  of  states  or  municipalities  and  the 
salaries  of  state  officers.  But  this  would  appear  to  be  a 
strained  construction,  because  the  lack  of  authority  in  the  fed- 
eral government  to  tax  the  subjects  mentioned  does  not  arise 
from  any  explicit  provision  of  the  Constitution,  but  from  the 
relation  between  the  states  and  the  Union  and  the  necessity  of 
giving  to  each  an  entire  immunity  from  possibly  destructive 
taxation  on  the  part  of  the  other.  That  this  was  also  the  un- 
derstanding of  Congress  in  enacting  the  law  of  1913  is  shown 
by  the  fact  that  it  expressly  excludes  "interest  upon  the  obli- 
gations of  a  state  or  any  political  subdivision  thereof,"  and 
also  "the  compensation  of  all  officers  and  employees  of  a  state 
or  any  political  subdivision  thereof." 

On  the  other  hand,  the  decision  of  the  court  in  the  Pollock 

i  Pollock  v.  Farmers'  Loan  &  Trust  Co.,  158  U.  S.  601,  15  Sup.  Ct. 
912,  39  L.  Ed.  1108. 

(10) 


Ch.  2)        CONSTITUTIONAL  AND  STATUTORY  PROVISIONS         §  7 

•case  was  confined  to  the  question  of  the  constitutionality  of 
the  tax  in  so  far  as  it  bore  upon  income  derived  from  real  es- 
tate and  from  invested  personal  property.  It  was  not  decided 
that  a  tax  upon  income  derived  from  business  operations  or 
from  the  practice  of  a  trade  or  profession  or  the  receipt  of  a 
salary  was  a  direct  tax,  and  this  was  explained  by  Mr.  Justice 
Harlan,  in  his  dissenting  opinion,  as  equivalent  to  a  declara- 
tion that  no  apportionment  among  the  states  would  be  necessary 
in  so  far  as  a  tax  upon  incomes  might  be  laid  upon  those  sub- 
jects alone.  It  never  was  doubted  that  Congress  possessed 
the  power  to  tax  incomes  in  so  far  as  it  could  be  done  without 
infringing  upon  the  rightful  sovereignty  of  the  states.  The 
only  question  was  as  to  the  necessity  of  apportionment.  On 
this  question,  the  Supreme  Court  ruled  that  a  tax  on  income 
derived  from  certain  specified  sources  would  require  appor- 
tionment, while  a  tax  on  income  derived  from  certain  other 
.sources  would  not.  Now  the  Sixteenth  Amendment,  which 
was  prompted  by  the  decision  in  the  Pollock  case,  and  which 
need  not  have  been  proposed  and  adopted  if  it  had  not  been 
for  that  decision,  declares  that  there  shall  be  no  necessity  of 
apportionment  among  the  several  states,  nor  any  regard  to  the 
•census  or  enumeration,  for  the  purposes  of  a  federal  tax  on 
incomes  "from  whatever  source  derived."  It  does  not,  there- 
fore, enlarge  the  power  of  taxation  previously  possessed  by 
Congress,  but  merely  repeals  certain  parts  of  the  existing  Con- 
stitution which  imposed  a  limitation  upon  the  levying  of  one 
form  of  direct  taxation,  namely,  an  income  tax. 

§  7.     Provisions  of  State  Constitutions 

While  it  is  probable  that  an  express  grant  of  authority  in 
the  constitution  is  not  necessary  to  empower  the  legislature 
of  a  state  to  enact  a  general  system  of  income  taxation,2  yet 
the  imposition  of  an  income  tax  is  expressly  authorized  by 

a  See  Glasgow  v.  Rowse,  43  Mo.  479. 

(11) 


§  7  INCOME    TAXATION  (Ch.  2 

the  constitutions  of  several  of  the  states.3  But  in  some  cases 
the  power  of  the  legislature  is  carefully  restricted  in  this 
regard,  especially  with  a  view  to  avoiding  double  taxation  or 
a  burdensome  accumulation  of  taxes,  as  in  North  Carolina, 
where  the  constitution  provides  that  "the  general  assembly 
may  tax  trades,  professions,  franchises,  and  incomes,  provided 
that  no  income  shall  be  taxed  when  the  property  from  which 
the  income  is  derived  is  taxed."  *  In  Wisconsin,  the  state 
which  now  possesses  the  most  complete  and  detailed  system 
of  income  taxation,  it  was  at  first  doubted  whether  the  orig- 
inal provision  of  the  constitution  was  sufficiently  broad  to 
permit  the  levying  of  this  kind  of  a  tax.  It  was  merely  ex- 
pressed as  follows :  "The  rule  of  taxation  shall  be  uniform, 
and  taxes  shall  be  levied  upon  such  property  as  the  legislature 
shall  prescribe."  This  had  been  held  as  not  expressly  forbid- 
ding excise  taxation,  and  therefore  as  admitting  of  a  collateral 
inheritance  tax,5  but  when  a  tax  on  incomes  was  proposed, 
the  legislature  (in  1905  and  1907)  passed  a  resolution  recom- 
mending an  amendment  to  the  section  of  the  constitution 
above  quoted  by  the  addition  of  the  following  words :  "Taxes 
may  also  be  imposed  on  incomes,  privileges,  and  occupations, 
which  taxes  may  be  graduated,  and  progressive  and  reason- 
able exemptions  may  be  provided."  This  change  was  rati- 
fied by  the  people  of  the  state  at  a  general  election  held  in 
1908,  and  three  years  later  (1911)  the  legislature  enacted  a  stat- 
ute laying  a  tax  upon  incomes  and  intended  eventually  to  su- 
persede all  forms  of  personal  property  taxation.6 

a  See,  for  instance,  Const.  Cal.,  art.  13,  §  11 ;  Const.  Tenn.,  art.  2, 
§  28 ;  Const  Texas,  art.  8,  §  1 ;  Const.  Wis.,  art.  8,  §  1. 

*  Const.  N.  Car.,  art.  5,  §  3. 

s  Nunnemacher  v.  State,  129  Wis.  190,  108  N.  W.  627,  9  L.  R.  A. 
(N.  S.)  121. 

e  Const.  Wis.,  art.  8,  §  1.  And  see  State  v.  Frear,  148  Wis.  456, 
134  N.  W.  673,  26  Am.  &  Eng.  Ann.  Cas.  1147. 

(12) 


Ch.  2)        CONSTITUTIONAL   AND  STATUTORY  PROVISIONS         §  8 

§  8.     History  of  Income  Tax  Laws 

In  England,  the  first  income  tax  law  was  proposed  by  Pitt, 
and  was  enacted  by  act  of  Parliament,  January  9,  1799  7  since 
which  time,  with  occasional  short  lapses,  income  taxation  has 
always  formed  a  chief  source  of  revenue  in  the  United  King- 
dom. But  the  acts  which  have  remained  in  force,  with  some 
modifications  and  minor  changes,  to  the  present  time,  and 
which  have  had  a  most  important  influence,  by  way  of  sug- 
gestion and  precedent,  upon  the  frame-work  of  all  income  tax 
laws  in  the  United  States,  are  the  statutes  of  1842  and  1853. 8 

In  America,  many  states  have  at  different  times  experi- 
mented with  taxes  of  this  kind,  enacting,  repealing,  and  some- 
times re-enacting  them,  but  few  have  continuously  availed 
themselves  of  this  source  of  revenue  until  comparatively  re- 
cent times.  Even  as  early  as  the  colonial  period  statutes  were 
here  and  there  in  force  which  did  practically  and  substantially 
tax  certain  classes  of  incomes,  though  not  by  that  name. 
Again,  in  the  years  between  1840  and  1850,  laws  of  this  char- 
acter were  sporadically  enacted,  as  also  in  the  following  dec- 
ade, when  income  tax  laws  were  put  in  force  in  Alabama, 
Louisiana,  and  Missouri  (among  others),  which  are  not  now 
in  force.  But  for  all  practical  purposes  the  interest  of  the 
student  of  law  and  economics  will  center  upon  two  foci, 
namely,  the  period  of  the  Civil  War  and  what  may  be  called 
the  period  of  present-day  activity  in  income  tax  legislation, 
the  latter  beginning  about  1894. 

The  first  attempt  of  Congress  to  levy  a  tax  of  this  kind  was 
made  in  1861,  when  it  was  sorely  pressed  with  the  burden  of 
providing  revenue  to  carry  on  the  pending  war.  This  act 
levied  a  tax  upon  practically  all  sources  and  kinds  of  income, 
but  at  varying  rates,  viz.,  three  per  cent  upon  incomes  gen- 
erally, one  and  one-half  per  cent  upon  interest  on  treasury 
notes  and  United  States  bonds,  and  five  per  cent  on  the  in- 

i  Stat.  39  Geo.  Ill,  c.  13,  18  Stat.  at  L.,  p.  29. 

s  Stat.  5  &  6  Viet.,  c.  35 ;   Stat.  16  &  17  Viet,  c.  34. 

(13) 


§  8  INCOME   TAXATION  (Ch.  2 

comes  of  American  citizens  residing  abroad.  Annual  incomes 
below  $800  were  exempted.  The  tax  was  to  be  levied  and 
collected  for  only  one  year,  that  is,  on  the  income  of  1861,  and 
no  elaborate  system  for  its  collection  was  provided,  adminis- 
trative details  being  left  to  the  regulation  of  the  officers  of 
the  treasury  department.  In  the  following  year,  1862,  this  act 
was  re-enacted,  but  with  very  important  changes.  The  ex- 
emption was  now  fixed  at  $600,  and  the  tax  was  at  the  rate 
of  three  per  cent  on  incomes  between  that  minimum  and  the 
sum  of  $10,000,  and  five  per  cent  on  all  incomes  exceeding 
the  latter  amount,  as  also  upon  the  incomes  (irrespective  of 
amount)  of  American  citizens  living  abroad,  except  those  in 
the  service  of  the  government.  Salaries  of  persons  in  the  em- 
ploy of  the  United  States,  including  senators  and  representa- 
tives in  Congress,  were  exempted,  and  provision  was  also  made 
for  the  deduction  from  taxable  income  of  other  taxes  paid 
by  the  subject  and  also  dividends  received  from  corporations 
subject  to  tax.  The  statute  was  to  be  in  force  until  and  in- 
cluding the  year  1866  and  no  longer,  and  taxable  persons  were 
required  to  make  returns  of  their  income.  In  the  next  year 
(1863)  this  act  was  amended  by  permitting  the  taxpayer  to 
deduct  from  his  taxable  income  rent  paid  for  the  dwelling 
house  in  which  he  resided.  The  income  tax  law  of  1864,  as 
amended  in  1865,  materially  increased  the  burden  of  taxation, 
the  exemption  remaining  as  before,  but  the  duty  being  now 
fixed  at  five  per  cent  on  incomes  up  to  $5,000,  and  ten  per 
cent  on  the  excess  over  that  sum.  Several  new  features  were 
now  introduced,  as,  for  instance,  a  partial  attempt  at  "col- 
lection at  the  source"  by  taxing  dividends  declared  by  certain 
kinds  of  corporations  and  then  permitting  the  stockholder 
to  deduct  the  same  from  his  estimate  of  income,  and  a  like 
provision  as  to  persons  paid  by, the  government.  Now  for  the 
first  time  also  we  meet  the  provision  that  only  one  deduction 
of  $600  shall  be  allowed  from  the  aggregate  incomes  of  the 
members  of  a  family.  Salaries  paid  to  persons  in  the  em- 

(14) 


Ch.  2)        CONSTITUTIONAL  AND   STATUTORY   PROVISIONS         §  8 

ployment  of  the  United  States,  including  the  members  of  Con- 
gress, were  now  subjected  to  the  tax,  as  also  premiums  on 
gold.  But  the  rental  value  of  a  homestead  owned  and  occu- 
pied by  the  taxpayer  was  not  to  be  included.  Special  provi- 
sions were  made  for  estimating  the  income  and  the  allowable 
deductions  of  farmers  and  stock-raisers.  The  life  of  the  act 
was  limited  to  the  year  1870.  It  was  amended  in  details  in 
1866  and  1867.  Again  in  1870  a  statute  was  passed,  to  be  in 
force  only  for  that  year  and  the  one  following,  which  im- 
posed a  flat  tax  of  two  and  one-half  per  cent  on  income  from 
all  sources.  These  sources  were  elaborately  defined  and  de- 
scribed, and  it  may  be  remarked  that  they  were  made  to  in- 
clude interest  accrued  within  the  year  but  unpaid,  if  collect- 
ible, a  stockholder's  proportionate  share  of  the  undivided 
profits  of  the  corporation,  interest  on  United  $tates  securi- 
ties and  premiums  on  gold,  the  salaries  of  federal  officers  in- 
cluding members  of  Congress,  and  profits  realized  within  the 
year  from  sales  of  real  estate  purchased  within  two  years 
previous.  The  exemptions  or  deductions  included  the  sum  of 
$2,000  of  income  and  also  pensions  under  the  laws  of  the 
United  States,  taxes  paid,  losses  sustained  and  bad  debts  writ- 
ten off  within  the  year,  "but  excluding  all  estimated  deprecia- 
tion of  values,"  interest  paid,  and  rent  and  the  expenses  of 
business.  Consuls  of  foreign  countries  were  exempted  from 
the  payment  of  the  tax,  so  far  as  concerned  their  official  emolu- 
ments and  income  from  their  property  in  foreign  countries, 
but  only  in  case  their  governments  reciprocated.  It  is  a  sig- 
nificant fact  that,  during  all  this  period,  there  was  no  attempt 
to  tax  corporations  as  such,  except  that  the  acts  of  1862,  1864, 
and  1870  laid  a  tax  on  the  dividends  declared,  and  interest 
paid,  by  banks,  trust  companies,  savings  institutions,  insur- 
ance companies,  and  railroads  and  other  transportation  com- 
panies. 

The  period  of  modern   activity  in  income  tax  legislation 
was  inaugurated  by  the  enactment  of  the  federal  income  tax 

(15) 


§  8  INCOME   TAXATION  (Ch.  2 

act  of  1894.  This  statute  was  intended  to  expire  by  its  own 
limitation  in  1900,  but  in  the  year  following  its  passage  it 
was  adjudged  unconstitutional  and  therefore  was  not  en- 
forced. Allowing  an  exemption  of  $4,000,  it  imposed  a  tax 
of  two  per  cent  on  all  income  above  that  amount,  from  what- 
ever source  derived,  and  a  like  tax  upon  the  net  earnings 
of  all  corporations  doing  business  within  the  United  States 
(not  including  partnerships),  except  corporations  for  char- 
itable, religious,  or  educational  purposes,  fraternal  benefit  so- 
cieties, mutual  insurance  companies,  and  certain  kinds  of 
building  and  loan  associations  and  savings  banks.  It  made 
some  provision  for  collection  of  the  tax  at  the  source,  and 
covered  carefully  the  administrative  features  of  such  a  tax, 
in  regard  to  returns,  the  method  of  collection,  the  imposition 
and  recovery  of  penalties,  and  conditions  upon  the  publicity 
of  the  returns.  But  in  other  respects  it  did  not  differ  very 
materially  from  the  last  and  most  elaborate  of  the  earlier 
acts,  that  of  1870.  The  corporation  excise  tax  law  of  1909 
imposed  a  tax  of  one  per  cent  upon  the  entire  net  income  (over 
and  above  $5,000)  received  in  each  year  by  "every  corpora- 
tion, joint  stock  company  or  association  organized  for  profit 
and  having  a  capital  stock  represented  by  shares,  and  every 
insurance  company,"  whether  organized  under  state  or  terri- 
torial or  federal  laws,  or  organized  under  the  laws  of  a  for- 
eign country  and  engaged  in  business  in  any  state  and  terri- 
tory of  the  United  States.  In  its  main  features,  this  stat- 
ute very  closely  resembled  that  act  of  1894,  in  so  far  as  the 
latter  was  applicable  to  corporations.  But  the  tax  laid  by  the 
act  of  1909  was  specifically  denominated  a  "special  excise 
tax,"  and  was  declared  to  be  imposed  "with  respect  to  the 
carrying  on  or  doing  business  by  such  corporation."  This  was 
in  reality  an  income  tax  very  thinly  disguised,  and  restricted 
to  corporations.  But  the  theoretical  distinction  between  a 
tax  on  income  and  a  tax  on  the  privilege  of  doing  business 
in  a  corporate  capacity,  as  measured  by  income,  afforded  suffi- 

(16) 


Ch.  2)        CONSTITUTIONAL   AND   STATUTORY  PROVISIONS          §  8 

cient  ground  for  the  courts  to  hold  that  it  was  not  a  direct  tax 
and  therefore  not  in  conflict  with  the  constitution.9  Finally, 
as  concerns  the  activity  in  this  direction  of  the  United  States 
government,  the  tariff  act  of  1913  contained  a  section  im- 
posing a  tax  upon  the  incomes  of  both  individuals  and  cor- 
porations. This  statute  will  not  now  be  discussed  in  detail, 
as  its  provisions  will  form  a  principal  subject  for  considera- 
tion in  the  following  pages. 

The  act  of  1913,  it  should  be  remarked,  supersedes  and  re- 
peals the  corporation  excise  tax  law  of  1909.  But  in  order 
that  corporations  may  not  escape  taxation  for  any  part  of 
the  year  1913,  that  year  is  divided  into  two  portions,  as  to 
one  of  which  the  excise  tax  is  to  be  assessed  and  collected, 
and  as  to  the  other  the  income  tax.  The  act  provides  that 
"an  excise  tax  upon  the  doing  of  business,  equivalent  to  one 
per  centum  upon  their  entire  net  income,  shall  be  levied,  as- 
sessed, and  collected  upon  corporations,  joint  stock  companies 
or  associations,  and  insurance  companies,  of  the  character 
described  in  section  38  of  the  act  of  August  5,  1909,  for  the 
period  from  January  first  to  February  twenty-eighth,  1913, 
both  dates  inclusive,  which  said  tax  shall  be  computed  upon 
one-sixth  of  the  entire  net  income  of  said  corporations,  joint 
stock  companies  or  associations,  and  insurance  companies,  for 
said  year."  And  the  provisions  of  the  act  of  1909,  "relative  to 
the  collection  of  the  tax  therein  imposed,  shall  remain  in  force 
for  the  collection  of  the  excise  tax  herein  provided."  As  to 
the  remainder  of  the  year,  the  imposition  of  the  income  tax 
upon  any  corporation  subject  to  its  terms  is  effected  by  a 
requirement  that  "said  tax  shall  be  imposed  upon  its  entire 
net  income  accruing  during  that  portion  of  said  year  (1913) 
from  March  first  to  December  thirty-first,  both  dates  inclu- 
sive, to  be  ascertained  by  taking  five-sixths  of  its  entire  net 
income  for  said  calendar  year."  But  for  the  year  1913  "it 

»  Flint  v.  Stone  Tracy  Co.,  220  U.  S.  107,  31  Sup.  Ct.  342,  55  L. 
Ed.  389. 

BL.INC.TAX. — 2 


§  8  INCOME    TAXATION  (Ch.  2 

shall  not  be  necessary  to  make  more  than  one  return  and 
assessment  for  all  the  taxes  imposed  herein  upon  said  cor- 
porations, joint  stock  companies  or  associations,  and  insurance 
companies,  either  by  way  of  income  or  excise,  which  return 
and  assessment  shall  be  made  at  the  times  and  in  the  manner 
provided  in  this  act.  But  the  repeal  of  existing  laws  or  mod- 
ifications thereof  embraced  in  this  act  shall  not  affect  any 
act  done,  or  any  right  accruing  or  accrued,  or  any  suit  or  pro- 
ceeding had  or  commenced  in  any  civil  case  before  the  said 
repeal  or  modification ;  but  all  rights  and  liabilities  under  said 
laws  shall  continue  and  may  be  enforced  in  the  same  manner 
as  if  said  repeal  or  modifications  had  not  been  made.  Any 
offenses  committed  and  all  penalties  or  forfeitures  or  liabil- 
ities incurred  prior  to  the  passage  of  this  act  under  any  stat- 
ute embraced  in  or  changed,  modified,  or  repealed  by  this 
act  may  be  prosecuted  or  punished  in  the  same  manner  and 
with  the  same  effect  as  if  this  act  had  not  been  passed." 

As  regards  the  legislation  of  the  states  in  the  more  recent 
period,  it  may  be  mentioned  that  an  income  tax  law,  not  very 
complete  or  detailed,  was  enacted  in  North  Carolina  in  1907, 
a  somewhat  similar  act  by  South  Carolina  in  1902,  an  act 
closely  resembling  that  of  North  Carolina  by  Oklahoma  in 
1907,  a  short  statute,  but  intended  to  include  all  kinds  of  in- 
come, by  Virginia  in  1903  and  amended  in  1908,  a  compre- 
hensive statute,  modeled  on  the  various  acts  of  Congress,  by 
the  territory  of  Hawaii  in  1901,  and  a  very  long  and  detailed 
income  tax  law  by  Wisconsin  in  1911.  In  addition  to  these, 
there  are  special  and  restricted  income  tax  provisions  in  force 
in  Massachusetts  and  Tennessee,  brought  down  from  earlier 
legislation  in  those  states  and  included  in  their  later  codes  or 
revisions. 

§  9.     Income  Tax  Laws  in  Force 

From  the  foregoing  historical  review  it  will  be  seen  that 
income  tax  laws  are  now  in  force  not  only  for  the  United 

(18) 


Ch.  2)        CONSTITUTIONAL  AND   STATUTORY  PSOVISIONS          §  9 

States  generally,  by  the  legislation  of  Congress,  but  also  in 
and  for  the  following  states  and  territories:  Wisconsin,  Vir- 
ginia, North  Carolina,  South  Carolina,  Massachusetts,  Ten- 
nessee, Oklahoma,  and  Hawaii.  The  text  of  all  these  stat- 
utes, including  the  acts  of  Congress  passed  between  1861  and 
1870  and  the  act  of  1894  and  the  corporation  tax  law  of  1909, 
as  well  as  the  federal  income  tax  law  of  1913,  will  be  found 
printed  in  full  in  the  appendix  to  this  volume. 

But  it  is  not  alone  in  America  that  taxation  of  incomes  has 
been  resorted  to  as  a  rich  source  of  governmental  revenue. 
On  the  contrary, — in  some  cases  only  from  recent  times, 
but  in  others  for  more  than  a  century — the  income  tax  has 
been,  and  is  still,  employed  in  England  and  several  of  her 
colonies,  in  Norway,  Sweden,  and  Denmark,  in  Prussia,  Aus- 
tria, and  Italy,  and  in  fact  in  practically  all  the  great  civilized 
nations  of  the  world,  with  the  exception  of  France.  As  ob- 
served by  the  court  in  Wisconsin,  in  considering  the  validity 
of  the  statute*  of  that  state :  "It  may  be  well  to  note  that 
income  taxation  is  no  new  and  untried  experiment  in  the  field 
of  taxation.  It  has  been  in  use  in  various  forms,  and  general- 
ly with  the  progressive  feature,  by  many  of  the  civilized  gov- 
ernments of  the  world  for  decades,  which  in  some  instances 
run  into  centuries.  It  has  been  used  at  various  times  by  nearly 
or  quite  twenty  of  our  own  states,  and  is  now  in  use  in  sev- 
eral of  them.  It  was  used  for  a  brief  period  by  the  govern- 
ment of  the  United  States,  and  is  now  in  successful  operation 
in  practically  all  of  the  great  nations  of  the  civilized  world, 
except  the  United  States."  10  As  to  the  last  sentence,  it  should 
be  remembered  that  this  was  written  in  1912,  and  the  excep- 
tion then  noted  has  now  ceased  to  exist. 

10  State  v.  Frear,  148  Wis.  456,  134  N.  W.  673,  26  Am.  &  Eng.  Ann. 
Cas.  1147. 

(19) 


§  10  INCOME   TAXATION  (Ch.  2 

§  10.     Economic  Aspects  of  Income  Taxation 

Although  we  are  here  concerned  rather  with  the  legal 
aspects  of  the  income  tax  laws  than  with  their  economic  justi- 
fication, it  may  be  well  to  add  what  has  been  said  on  this  sub- 
ject by  one  or  two  authorities.  As  to  this  method  of  raising 
revenue,  "the  fundamental  idea  upon  which  its  champions 
rest  their  argument  in  its  favor  is  that  taxation  should  logi- 
cally be  imposed  according  to  ability  to  pay,  rather  than  upon 
the  mere  possession  of  property,  which  for  various  reasons 
may  produce  no  revenue  to  the  owner.  It  is  argued  that 
there  should  be  as  nearly  as  practicable  equality  of  sacrifice 
among  the  various  taxpayers,  and  that  a  tax  levied  at  an  uni- 
form or  proportional  rate  can  rarely,  if  ever,  produce  equality 
of  sacrifice;  that  one  per  cent  of  a  small  income,  which  just 
suffices  to  support  its  owner,  is  a  far  larger  relative  contribu- 
tion to  the  public  treasury  than  one  per  cent  of  an  income  so 
large  that  it  cannot  be  exhausted  by  the  owner,  except  by 
means  of  lavish  and  extravagant  expenditures.""11  "In  theory 
an  income  tax  is  an  ideal  one.  Much  property  is  necessarily 
carried  by  citizens  of  a  state  that  is  unproductive,  and  hence 
yields  but  little  income  out  of  which  taxes  may  be  paid; 
while,  on  the  other  hand,  if  the  state  only  demands  a  part  of 
the  income  actually  earned,  it  works  no  hardship  on  its  citi- 
zens. If  each  man  paid  taxes  according  to  his  income,  those 
who  have  most  would  pay  most,  and  those  who  have  least 
would  pay  least."  12 

11  State  v.  Frear,  148  Wis.  456,  134  N.  W.  673,  26  Am.  &  Eng.  Ann. 
Cas.  1147. 

12  Report  of  Minnesota  State  Tax  Commission,  1910. 

(20) 


Ch.  3)  CONSTITUTIONAL   VALIDITY  §  11 

CHAPTER  III 

CONSTITUTIONAL  VALIDITY  OF  INCOME  TAX  LAWS 

§  11.  Requirement  of  Due  Process  of  Law. 

12.  Requirement  of  Equality  and  Uniformity. 

13.  Equal  Protection  of  the  Laws. 

14.  Discrimination  Between  Corporations,  Partnerships,  and  In- 

dividuals. 

15.  Discrimination  Between  Residents  and  Non-Residents. 

16.  Federal  Taxation  of  Corporations  Created  by  States. 

17.  Taxation  of  Income  from  Non-Taxable  Property. 

18.  Taxing  Salaries  of  Federal  and  State  Officers. 

19.  Exemption  of  Incomes  Below  a  Fixed  Sum. 

20.  Exemption  of  Classes  of  Individuals  or  Corporations. 

21.  Allowance  of  Deduction  for  Other  Taxes  Paid. 

22.  Double  Taxation. 

23.  Taxing  Aggregate  Income  of  Family. 

24.  Validity  of  Graduated  or  Progressive  Tax. 

25.  Retrospective  Operation  of  Statute. 

26.  Objections  as  to  Title,  Purpose,  and  Mode  of  Enactment  of 

Statute. 

27.  Objections  to  Administrative  Provisions  of  Act 

28.  Apportionment  of  Federal  Income  Tax. 

§  11.     Requirement  of  Due  Process  of  Law 

As  applied  to  the  levy,  assessment,  and  collection  of  taxes, 
the  constitutional  requirement  of  due  process  of  law  does  not 
mean  that  either  the  validity  of  the  tax  or  the  liability  of  the 
particular  person  or  property  should  be  adjudicated  by  a 
court  of  justice.  Nor  does  it  mean  that  personal  notice  should 
be  given  to  the  taxpayer  of  each  or  any  step  in  the  proceed- 
ings. It  is  enough  if  he  is  informed  of  the  amount  for  which 
he  is  to  be  charged,  and  is  afforded  an  opportunity  to  contest 
the  legality  of  the  tax,  the  question  of  his  liability  to  it,  or 
the  amount  of  his  assessment,  before  some  board  or  tribunal 
empowered  to  give  him  all  the  relief  which  justice  may  de- 
mand, though  it  be  a  board  of  administrative  officers  in  the 

(21) 


§  11  INCOME   TAXATION  (Ch.  3 

first  instance,  with  a  final  appeal  to  the  courts.1  As  this 
method  of  procedure  has  commonly  been  prescribed  by  the 
income  tax  laws,  their  constitutional  validity  has  been  upheld 
as  against  the  contention  that  they  deprived  the  citizen  of  his 
property  without  due  process  of  law.2  In  one  of  the  cases 
dealing  with  this  question  it  was  said:  "The  claim  that  the 
act  deprives  the  plaintiff  of  his  property  without  due  process 
of  law,  and  denies  him  the  equal  protection  of  the  laws,  raises 
questions  under  the  federal  constitution,  upon  which  the  de- 
cisions of  the  Supreme  Court  of  the  United  States  are  au- 
thoritative and  controlling.  In  solving  these  questions  we 
must  therefore  be  guided  by  the  decisions  of  that  court.  In 
the  Kentucky  Railroad  Tax  Cases,  115  U.  S.  321,  6  Sup.  Ct. 
57,  29  L.  Ed.  414,  the  court  considered  a  statute  of  the  state 
of  Kentucky,  which  involved  both  these  constitutional  guar- 
anties. Upon  the  question  of  what  is  due  process  of  law,  in 
the  matter  of  levying  and  collecting  taxes,  the  court,  by  Mr. 
Justice  Matthews,  said:  'It  has  been  repeatedly  decided  by 
this  court  that  the  proceedings  to  raise  the  public  revenue  by 
levying  and  collecting  taxes  are  not  necessarily  judicial,  and 
that  due  process  of  law,  as  applied  to  that  subject,  does  not 
imply  or  require  the  right  to  such  notice  and  hearing  as  are 
considered  to  be  essential  to  the  validity  of  the  proceedings 
and  judgments  of  judicial  tribunals.  Notice  by  statute  is  gen- 
erally the  only  notice  given,  and  that  has  been  held  sufficient. 
"In  judging  what  is  due  process  of  law,"  said  Mr.  Justice 
Bradley  in  Davidson  v.  New  Orleans,  96  U.  S.  97,  24  L.  Ed. 
616,  "respect  must  be  had  to  the  cause  and  object  of  the 
taking,  whether  under  the  taxing  power,  the  power  of  eminent 
domain,  or  the  power  of  assessment  for  local  improvements,  or 
none  of  these;  and  if  found  to  be  suitable  or  admissible  in 


1  Black,  Const.  Law  (3d  edn.)  p.  580. 

2  Flint  v.  Stone  Tracy  Co.,  220  U.  S.  107,  31  Sup.  Ct.  342,  55  L.  Ed. 
389;    Alderman  v.  Wells,  85  S.  C.  507,  67  S.  E.  781,  21  Am.  &  Eng. 
Ann.  Cas.  193,  27  L.  R.  A.  (N.  S.)  864. 

(22) 


Ch.  3)  CONSTITUTIONAL  VALIDITY  §  12 

the  special  case,  it  will  be  adjudged  to  be  due  process  of  law, 
but  if  found  to  be  arbitrary,  oppressive,  and  unjust,  it  may  be 
declared  to  be  not  due  process  of  law."  In  its  application  to 
proceedings  for  the  levy  and  collection  of  taxes,  it  was  said 
in  McMillen  v.  Anderson,  95  U.  S.  37,  42,  24  L.  Ed.  335, 
that  it  "is  not,  and  never  has  been,  considered  necessary  to 
the  validity  of  a  tax  that  the  party  charged  should  have  been 
present,  or  had  an  opportunity  to  be  present,  in  some  tribunal, 
when  he  was  assessed."  This  language,  it  is  true,  was  used 
in  the  decision  of  a  case  in  reference  to  a  license  tax,  where 
all  the  circumstances  of  its  assessment  were  declared  by  stat- 
ute, and  nothing  was  intrusted  to  the  discretion  of  public  offi- 
cers ;  but  in  the  State  Railroad  Tax  Cases,  92  U.  S.  575,  610, 
23  L.  Ed.  663,  where  the  ascertainment  of  the  taxable  value 
of  railroads  was  the  duty  of  a  board,  as  in  the  present  case, 
whose  assessment  was  challenged  for  the  reason  that  the  pro- 
ceedings were  not  due  process  of  law,  and  for  want  of  notice 
and  a  hearing,  it  was  said  by  Mr.  Justice  Miller,  delivering 
the  opinion  of  the  court:  "This  board  has  its  time  of  sitting 
fixed  by  law.  Its  sessions  are  not  secret.  No  obstruction 
exists  to  the  appearance  of  any  one  before  it  to  assert  a  right 
or  redress  a  wrong,  and,  in  the  business  of  assessing  taxes, 
this  is  all  that  can  be  reasonably  asked." '  "  8 

§  12.     Requirement  of  Equality  and  Uniformity 

"Property,"  as  the  term  is  used  in  reference  to  taxation, 
means  the  corpus  of  an  estate  or  investment,  as  distinguished 
from  the  annual  gain  or  revenue  from  it.  Hence  a  man's  in- 
come is  not  "property"  within  the  meaning  of  a  constitu- 
tional requirement  that  taxes  shall  be  laid  equally  and  uni- 
formly upon  all  property  within  the  state.4  For  this  rea- 


3  Alderman  v.  Wells,  85  S.  C.  507,  67  S.  E.  781,  21  Am.  &  Eng. 
Ann.  Cas.  193,  27  L.  R.  A.  (N.  S.)  864,  citing  also  Cass  Farm  Co.  v. 
Detroit,  181  U.  S.  396,  21  Sup.  Ct.  644,  45  L.  Ed.  914. 

*  Waring  v.  Savannah,  60  Ga.  93 ;   Glasgow  v.  Rowse,  43  Mo.  479. 

(23) 


§  13  INCOME    TAXATION  (Ch.  3 

son,  no  valid  objection  to  an  income  tax  on  constitutional 
grounds  can  be  based  on  the  fact  that  it  may  exempt  certain 
classes  of  persons  or  corporations  while  taxing  others,  or 
that  it  may  be  graduated  or  progressive,  bearing  with  in- 
creasing severity  upon  the  citizen  in  proportion  as  his  in- 
come increases.  Whatever  force  such  objections  might  pos- 
sess as  applied  to  a  general  property  tax,  a  tax  on  incomes 
is  not  included  in  the  constitutional  requirement.5  And 
where  the  provision  of  the  constitution  is  broader, — as,  that 
"taxation  shall  be  equal  and  uniform," — still  it  is  said,  in 
relation  to  income  taxes,  that  this  requirement  is  satisfied 
by  such  regulations  as  will  secure  an  equal  rate  and  just 
valuation,  without  reference  to  the  method  of  valuation, 
and  in  order  to  be  uniform  a  tax  need  not  be  imposed  and 
assessed  upon  all  property  by  the  same  agency  or  officers.6 
So,  as  regards  the  provision  of  the  federal  constitution  that 
taxes  imposed  by  act  of  Congress  shall  be  "uniform  through- 
out the  United  States,"  it  is  said  that  the  uniformity  here 
required  is  a  geographical  uniformity,  which  does  not  re- 
quire the  equal  application  of  the  tax  to  all  persons  or  cor- 
porations who  may  come  within  its  operation,  and  hence 
taxing  a  business  when  carried  on  by  a  corporation,  and  ex- 
empting a  similar  business  when  carried  on  by  a  partner- 
ship or  by  a  private  individual,  as  was  done  by  the  corpora- 
tion excise  tax  law  of  1909,  does  not  invalidate  the  tax.7 

§  13.     Equal  Protection  of  the  Laws 

Income  tax  laws  have  commonly  contained  provisions 
classifying  the  subjects  of  taxation,  discriminating  between 
individuals  and  corporations,  or  between  residents  and  non- 

B  Alderman  v.  Wells,  85  S.  C.  507,  67  S.  E.  781,  21  Am.  &  Eng. 
Ann.  Cas.  193,  27  L.  R.  A.  (N.  S.)  864. 

e  Commonwealth  v.  Brown,  91  Va.  762,  21  S.  E.  357,  28  L.  R.  A. 
110. 

7  Flint  v.  Stone  Tracy  Co.,  220  U.  S.  107,  31  Sup.  Ct.  342,  55  L. 
Ed.  389. 

(24) 


Ch.  3)  CONSTITUTIONAL   VALIDITY  §  13 

residents,  exempting  certain  classes  of  companies  or  those 
engaged  in  certain  pursuits,  allowing  deduction  of  some 
items  and  not  of  others,  and  altogether  releasing  from  taxa- 
tion incomes  below  a  certain  minimum  and  imposing  a 
gradually  increasing  burden  upon  incomes  above  that  sum. 
On  account  of  these  features  they  have  always  been  urgent- 
ly assailed  as  denying  the  "equal  protection  of  the  laws." 
But  without  avail.  This  provision,  it  is  held,  does  not  pre- 
vent such  reasonable  classifications  and  distinctions  as  those 
mentioned.  Thus,  in  a  decision  sustaining  the  income  tax 
law  of  the  territory  of  Hawaii,  it  was  said  that  the  clause 
in  the  Fourteenth  Amendment  to  which  reference  is  made 
does  not  require  taxes  to  be  levied  by  a  uniform  method  and 
at  the  same  rate  upon  every  class  of  property,  but  the  man- 
ner of  taxation  with  respect  to  each  class  is  left  to  the  legisla- 
tive discretion.8  Again:  "The  provision  in  the  Fourteenth 
Amendment  that  no  state  shall  deny  to  any  person  within 
its  jurisdiction  the  equal  protection  of  the  laws  was  not  in- 
tended to  prevent  a  state  from  adjusting  its  system  of  taxa- 
tion in  all  proper  and  reasonable  ways.  It  may,  if  it  chooses, 
exempt  certain  classes  of  property  from  any  taxation  at  all, 
such  as  churches,  libraries,  and  the  property  of  charitable 
institutions.  It  may  impose  different  specific  taxes  upon 
different  trades  and  professions,  and  may  vary  the  rates  of 
excise  upon  various  products ;  it  may  tax  real  estate  and  per- 
sonal property  in  a  different  manner;  it  may  tax  visible 
property  only  and  not  tax  securities  for  payment  of  money ; 
it  may  allow  deductions  for  indebtedness  or  not  allow  them. 
All  such  regulations  and  those  of  like  character,  so  long  as 
they  proceed  within  reasonable  limits  and  general  usage,  are 
within  the  discretion  of  the  state  legislature,  or  the  people 
of  the  state  in  framing  their  constitution.  But  clear  and  hos- 
tile discriminations  against  particular  persons  and  classes, 
especially  such  as  are  of  an  unusual  character,  unknown  to 

s  Peacock  v.  Pratt,  121  Fed.  722,  58  C.  C.  A.  48. 

(25) 


§  13  INCOME   TAXATION  (Ch.  3 

the  practice  of  our  government,  might  be  obnoxious  to  the 
constitutional  prohibition.  It  would,  however,  be  imprac- 
ticable and  unwise  to  attempt  to  lay  down  any  general  rule 
or  definition  on  the  subject  that  would  include  all  cases. 
They  must  be  decided  as  they  arise.  We  think  that  we  are 
safe  in  saying  that  the  Fourteenth  Amendment  was  not  in- 
tended to  compel  the  states  to  adopt  an  iron  rule  of  equal 
taxation.  If  that  were  its  proper  construction,  it  would 
not  only  supersede  all  those  constitutional  provisions  and 
laws  of  some  of  the  states  whose  object  is  to  secure  equality 
of  taxation,  and  which  are  usually  accompanied  with  qualifi- 
cations deemed  material,  but  it  would  render  nugatory  those 
discriminations  which  the  best  interests  of  society  require, 
which  are  necessary  for  the  encouragement  of  needed  and 
useful  industries,  and  the  discouragement  of  intemperance 
and  vice,  and  which  every  state,  in  one  form  or  another, 
deems  it  expedient  to  adopt."9  And  again,  "there  is,  no 
general  supervision  on  the  part  of  the  nation  over  state  tax- 
ation, and  in  respect  to  the  latter  the  state  has,  speaking 
generally,  the  freedom  of  a  sovereign  both  as  to  the  objects 
and  methods.  It  was  well  said  in  the  opinion  of  the  circuit 
court  in  this  case  that  there  can  at  this  time  be  no  question, 
after  the  frequent  and  uniform  expressions  of  the  federal 
Supreme  Court,  that  it  was  not  designed  by  the  Fourteenth 
Amendment  to  the  constitution  to  prevent  a  state  from 
changing  its  system  of  taxation  in  all  proper  and  reasonable 
ways,  nor  to  compel  the  states  to  adopt  an  ironclad  rule  of 
equality,  to  prevent  the  classification  of  property  for  purposes 
of  taxation,  or  the  imposition  of  different  rates  upon  differ- 
ent classes.  It  is  enough  that  there  is  no  discrimination  in 
favor  of  one  as  against  another  of  the  same  class,  and  the 
method  for  the  assessment  and  collection  of  the  tax  is  not 


»  Bell's  Gap  R.  R.  Co.  v.  Pennsylvania,  134  U.  S.  232,  10  Sup.  Ct 
533,  33  L.  Ed.  892. 

(26) 


Ch.  3)  CONSTITUTIONAL   VALIDITY  §  13 

inconsistent  with  natural  justice."  10  Particularly  with  ref- 
erence to  the  progressive  or  graduated  features  of  a  tax  law 
(though  the  statute  in  question  was  an  inheritance  tax  law 
and  not  an  income  tax  law)  the  Supreme  Court  of  the  United 
States,  sustaining  the  validity  of  the  law,  said :  "What  satis- 
fies this  equality  has  not  been,  and  probably  never  can  be, 
precisely  defined.  Generally  it  has  been  said  that  it  only  re- 
quires the  same  means  and  methods  to  be  applied  impar- 
tially to  all  the  constituents  of  each  class,  so  that  the  law 
shall  operate  equally  and  uniformly  upon  all  persons  in  simi- 
lar circumstances."  X1  And  the  court  in  South  Carolina  re- 
marks :  "The  right  of  the  legislature  of  the  state  to  make 
reasonable  classifications  of  persons  and  property  for  public 
purposes  has  been  so  often  affirmed  by  the  courts  that  it  can 
no  longer  be  questioned.  If  the  classification  is  not  ar- 
bitrary,— that  is,  if  it  bears  reasonable  relation  to  the  pur- 
poses to  be  effected, — and  if  the  constituents  of  each  class 
are  all  treated  alike,  under  similar  circumstances  and  condi- 
tions, the  rule  of  equality  is  satisfied."  12  So  the  Supreme 
Court  of  Wisconsin  declares:  "The  sum  and  substance  of 
it  is  that  the  Fourteenth  Amendment  never  was  intended  to 
lay  upon  the  states  an  unbending  rule  of  equal  taxation. 
The  states  may  make  exemptions,  levy  different  rates  upon 
different  classes,  tax  such  property  as  they  choose,  and 
make  such  deductions  as  they  choose,  and  so  long  as  they 
obey  their  own  constitutions  and  proceed  within  reasonable 
limits  and  general  usage,  there  is  no  power  to  say  them 
nay."  13 

10  Michigan  Cent.  R.  Co.  v.  Powers,  201  U.  S.  245,  26  Sup.  Ct.  459, 
50  L.  Ed.  744. 

11  Magoun  v.  Illinois  Trust  &  Savings  Bank,  170  U.  S.  283,  18  Sup. 
Ct  594,  42  L.  Ed.  1037. 

12  Alderman  v.  Wells,  85  S.  C.  507,  67  S.  E.  781,  21  Am.  &  Eng. 
Ann.  Cas.  193,  27  L.  R.  A.  (N.  S.)  864. 

is  State  v.   Frear,  148  Wis.  456,  134  N.  W.  673,  26  Am.  &  Eng. 
Ann.  Cas.  1147. 

(27) 


§  13  INCOME   TAXATION  (Ch.  3 

The  same  principles  apply  to  the  validity  of  any  income 
tax  law  enacted  by  Congress.  Although  the  provision 
against  laws  denying  the  equal  protection  of  the  law  applies 
only  to  the  legislation  of  the  states,  it  is  probable  that  other 
clauses  of  the  Constitution  could  be  found  which  would 
stand  in  the  way  of  any  act  of  Congress  containing  arbi- 
trary, invidious,  or  unreasonable  discriminations  against  in- 
dividuals or  classes.  But  within  reasonable  limits,  "we  must 
not  forget  that  the  right  to  select  the  measure  and  objects  of 
taxation  devolves  upon  the  Congress,  and  not  upon  the 
courts,  and  such  selections  are  valid  unless  constitutional 
limitations  are  overstepped.  It  is  no  part  of  the  function  of 
a  court  to  inquire  into  the  reasonableness  of  the  excise,  ei- 
ther as  respects  the  amount  or  the  property  upon  which  it 
is  imposed."  14 

§  14.     Discrimination  Between  Corporations,  Partnerships, 

and  Individuals 

The  substantial  difference  between  the  rights,  privileges, 
duties,  and  business  methods  of  corporations  and  those  of  in- 
dividuals engaged  in  business  has  been  thought  to  afford  a 
reasonable  basis  for  placing  them  in  different  classes,  for  the 
purposes  of  taxation.  Hence  an  income  tax  law  cannot  be 
adjudged  invalid,  as  making  unjust  or  illegal  discriminations, 
because  it  imposes  a  different  rate  of  taxation  upon  the  income 
of  corporations  from  that  imposed  on  the  income  of  individu- 
als, or  because  it  exempts  the  income  of  the  individual  be- 
low a  certain  sum,  but  does  not  grant  a  similar  exemption  to 
corporations.15  As  to  the  latter  point,  in  particular,  the 
theory  is  that  an  exemption  of  a  minimum  income  is  granted 
to  the  individual  in  lieu  of  a  deduction  for  personal  and 

i*  Flint  v.  Stone  Tracy  Co.,  220  U.  S.  107,  31  Sup.  Ct  342,  55  L. 
Ed.  389. 

is  state  v.  Frear,  148  Wis.  456,  134  N.  W.  673,  26  Am.  &  Eng. 
Ann.  Cas.  1147 ;  Flint  v.  Stone  Tracy  Co.,  220  U.  S.  107,  31  Sup.  Ct 
342,  55  L.  Ed.  389 ;  Robertson  v.  Pratt,  13  Hawaii,  590. 

(28) 


Ch.  3)  CONSTITUTIONAL  VALIDITY  §  15 

family  expenses,  and  that  no  rule  of  justice  requires  a  similar 
allowance  to  corporations,  which  have  no  such  expenses,  a  de- 
duction of  other  necessary  expenses  being  granted  in  both 
cases.16  For  similar  reasons,  there  is  a  sufficient  ground  for 
classification  between  individuals  and  partnerships  in  the  im- 
position of  an  income  tax.  And  the  Wisconsin  statute  was 
sustained  by  the  Supreme  Court  of  that  state,  against  the  con- 
tention that  it  made  an  unjust  discrimination  in  allowing  ex- 
emptions to  individuals  which  were  denied  to  partnerships.  It 
was  said:  "A  partnership  ordinarily  has  certain  distinct  and 
well-known  advantages  in  the  transaction  of  business  over  the 
individual,  arising  from  the  fact  that  it  allows  a  combination 
of  capital,  brains,  and  industry,  and  thus  makes  it  possible  to 
accomplish  many  things  which  an  individual  in  the  same  busi- 
ness cannot  accomplish.  Further  than  this,  however,  there  is 
another  consideration.  If  the  partner  have  individual  income 
from  other  sources  than  the  partnership  business  (as  many 
do),  his  exemptions  will  be  allowed  to  him  out  of  the  individual 
income,  and  thus,  if  he  were  also  allowed  exemptions  from  the 
partnership  income,  he  would  be  allowed  double  exemptions. 
Altogether  there  seems  to  be  ample  reason  for  the  classifica- 
tion." 17 

§  15.     Discrimination   Between   Residents   and  Non-Resi- 

dents 

Very  serious  objections  have  been  urged  against  the  various 
income  tax  laws,  on  account  of  the  discriminations  which  they 
have  ordinarily  made  as  between  residents  and  non-residents 
or  citizens  and  aliens.  It  has  been  adjudged  that  the  legis- 
lature may  put  foreign  insurance  companies  in  a  class  by 
themselves,  and  tax  them  at  the  rate  of  one  per  cent  on  their 
gross  incomes,  while  other  persons  and  corporations  are  taxed 


is  Robertson  v.  Pratt,  13  Hawaii,  590. 

IT  state  v.  Frear,  148  Wis.  456,  134  N.  W.  673,  26  Am.  &  Eng.  Ann. 
Cas.  1147. 

(29) 


§  15  INCOME    TAXATION  (Ch.  3 

two  per  cent  on  their  net  incomes  and  one  per  cent  on  their 
property.18  But  has  a  state  any  lawful  power  to  tax  the  in- 
come, or  any  part  of  the  income,  of  a  non-resident,  or  the 
United  States  to  tax  the  income  of  a  person  residing  abroad, 
whether  a  citizen  or  an  alien?  If  so,  is  it  an  unlawful  dis- 
crimination to  grant  exemptions  to  residents  and  deny  them  to 
non-residents?  Or  to  tax  the  entire  income  of  the  resident 
citizen,  and  to  tax  only  so  much  of  the  income  of  the  non- 
resident as  is  derived  from  sources  within  the  state?  And  in 
the  latter  case,  how  is  the  validity  of  the  law  affected  by  the 
fact  that  part  of  the_  non-resident's  taxed  income  may  be  de- 
rived from  business  or  operations  in  the  nature  of  interstate 
commerce?  Further,  is  it  essential  to  the  validity  of  the  stat- 
ute that  its  administrative  features,  in  regard  to  the  assess- 
ment and  collection  of  the  tax,  should  be  the  same  in  the  case 
of  residents  and  non-residents? 

It  cannot  be  said  that  these  questions  have,  as  yet,  been  au- 
thoritatively settled  by  the  courts.  They  were  strongly  urged 
upon  the  Supreme  Court  of  Wisconsin  in  the  case  which  test- 
ed and  sustained  the  constitutionality  of  the  income  tax  law  of 
that  state.  But  as  they  were  not  necessarily  implicated  in  the 
case,  and  as  the  court  held  that,  even  conceding  the  invalidity 
of  the  particular  features  of  the  law  which  were  objected  to, 
that  would  not  be  sufficient  ground  for  pronouncing  it  uncon- 
stitutional as  a  whole,  no  positive  decision  was  rendered.19 
But  the  opinion  of  the  court  contains  so  full  a  statement  of 
the  questions  referred  to,  and  of  the  considerations  which 
might  affect  their  decision,  as  to  require  quotation  at  some 
length.  Among  other  things,  it  was  said :  "It  is  argued  that 
the  provisions  which  deny  to  non-residents  the  exemptions 
which  are  allowed  to  residents,  and  which  allow  the  board  of 
review  to  increase  the  assessment  of  a  non-resident  without 


is  Robertson  v.  Pratt,  13  Hawaii,  590. 

i»  State  v.  Frear,  148  Wis.  456,  134  N.  W.  673,  26  Am.  &  Eng.  Ann. 
Cas.  1147. 

(30) 


Ch.  3)  CONSTITUTIONAL  VALIDITY  §  15 

notice,  while  requiring  notice  to  be  given  to  a  resident,  violate 
section  2  of  article  4  of  the  federal  Constitution,  which  pro- 
vides that  'the  citizens  of  each  state  shall  be  entitled  to  all 
privileges  and  immunities  of  citizens  in  the  several  states.' 
The  question  of  the  validity  of  the  provision  allowing  exemp- 
tions to  residents  of  the  state  and  denying  them  to  non-resi- 
dents is  raised,  and  receives  some  attention  in  the  briefs,  but 
was  not  mentioned  in  the  oral  arguments.  We  regard  it  as  a 
question  involved  in  considerable  doubt,  and  one  not  neces- 
sary to  be  passed  upon  now.  It  cannot  be  imagined  for  a 
moment  that  the  legislature  would  have  failed  to  pass  the  act 
had  it  not  contained  this  provision,  and  we  prefer  to  wait  un- 
til the  question  is  presented  in  a  concrete  case,  at  which  time 
there  will  be  opportunity  to  fully  consider  it  after  compre- 
hensive briefs  and  arguments.  It  seems  that  the  Supreme 
Court  of  the  United  States  decided,  in  Ward  v.  Maryland,  12 
Wall.  418,  20  L.  Ed.  449,  that  one  of  the  privileges  and  im- 
munities protected  by  the  section  quoted  is  the  right  to  be  ex- 
empt from  any  higher  taxes  or  excises  than  are  imposed  by 
the  state  upon  its  own  citizens.  Other  decisions  relied  on 
upon  the  same  side  are  In  re  Stanford's  Estate,  126  Cal.  112, 
54  Pac.  259,  45  L.  R.  A.  788,  and  Sprague  v.  Fletcher,  69  Vt. 
69,  37  Atl.  239,  37  L.  R.  A.  840,  and  the  cases  cited  in  the 
latter  case.  On  the  other  side  reliance  is  placed  on  the  analogy 
of  the  laws  providing  for  exemptions  from  execution  seizure, 
which  confine  their  benefits  to  residents,  and  upon  Travelers' 
Insurance  Co.  v.  Connecticut,  185  U.  S.  364,  22  Sup.  Ct.  673, 
46  L.  Ed.  949." 

Again,  in  the  same  opinion,  referring  to  certain  sections  of 
the  income  tax  law,  it  was  said:  "The  first  of  these  sections 
provides,  in  substance,  that  a  resident  shall  be  taxed  upon  all 
of  his  income  arising  from  rentals,  stocks,  bonds,  securities,  or 
evidences  of  debt,  whether  the  same  be  derived  from  sources 
within  or  without  the  state,  but  that  the  non-resident  shall  only 
be  taxed  upon  income  derived  from  sources  within  the  state  or 

(31) 


§  15  INCOME   TAXATION  (Ch.  3 

within  its  jurisdiction,  but  that  any  person  doing  business  both 
within  and  without  the  state  shall,  as  respects  that  part  of  his 
income  not  derived  from  rentals,  stock,  bonds,  and  securities, 
be  taxed  only  on  that  proportion  thereof  which  is  derived  from 
business  transacted  and  property  located  within  the  state,  to 
be  determined  in  the  manner  specified  in  subdivision  'e'  of  sec- 
tion 1770b,  of  the  Statutes,  as  far  as  applicable.  The  gen- 
eral purpose  of  the  section  is  quite  evident,  namely,  to  tax  a 
resident  upon  his  whole  income,  and  a  non-resident  only  upon 
his  income  plainly  derived  from  sources  within  the  territorial 
jurisdiction  of  the  state,  and  to  provide  that,  where  either  per- 
son is  engaged  in  a  business  interstate  in  its  character,  he  shall 
only  be  taxed  on  that  portion  of  the  income  derived  from  busi- 
ness transacted  and  property  located  within  the  state,  according 
to  the  rule  prescribed  in  section  1770b  for  determining  that 
proportion  of  capital  stock  of  a  foreign  corporation  doing 
business  in  this  state,  which  must  be  reported  to  the  Secretary 
of  State.  The  rule  so  imported  into  the  statute  is  an  arbitrary 
rule,  and  need  not  be  stated  at  length  in  the  view  we  now  take 
of  our  duty  with  regard  to  this  contention.  Two  fundamental 
objections  are  made  to  this  section:  First,  that  the  state  can- 
not tax  the  incomes  of  non-residents,  no  matter  from  what 
source  derived ;  and  second,  that  the  attempt  to  tax  a  part  of 
the  profits  derived  from  an  interstate  business,  under  the  rule 
adopted,  must  necessarily  result  in  a  taxation  of  the  receipts  of 
interstate  commerce,  and  hence  a  regulation  thereof,  which  is 
in  violation  of  that  clause  of  the  federal  Constitution  which 
gives  to  Congress  the  power  to  regulate  commerce  between  the 
states.  We  shall  decide  neither  of  these  questions  now.  If  the 
section  be  open  to  either  or  both  of  these  objections,  or  any 
others,  we  cannot  regard  that  fact  as  fatal  to  the  act.  The 
legislature  evidently  intended  to  avoid  both  of  the  objections 
made.  They  had  a  difficult  and  delicate  subject  to  deal  with. 
Had  they  been  authoritatively  informed  that  they  could  not 
constitutionally  tax  a  non-resident's  income  at  all,  and  could 
(32) 


Ch.  3)  CONSTITUTIONAL   VALIDITY  §  15 

not  divide  the  income  derived  partially  from  state  and  par- 
tially from  interstate  business,  we  have  no  idea  that  they  would 
on  that  account  have  abandoned  their  purpose  to  pass  the  law. 
Again,  if  they  provided  an  improper  rule  for  the  division  (con- 
ceding that  a  division  can  be  made  at  all),  there  seems  no  rea- 
son why  the  rule  may  not  be  rejected  and  the  proper  rule, 
which  will  carry  out  the  fundamental  purpose  of  the  provi- 
sion, be  used.  In  any  event,  we  are  fully  satisfied  that  the  re- 
jection of  any  or  all  of  the  provisions  objected  to  in  this  sec- 
tion cannot  reasonably  be  held  to  invalidate  the  whole  act." 

And  again,  it  was  remarked:  "A  strong  argument  is  made 
attacking  the  validity  of  section  1087,  m,  22,  which  provides 
in  substance  that  the  income  of  a  resident  derived  from  differ- 
ent political  subdivisions  of  the  state  shall  be  combined  for  the 
purpose  of  determining  the  exemptions  and  the  rate,  while  the 
income  of  a  non-resident  is  to  be  separately  assessed  and  taxed 
in  each  of  the  municipalities  from  which  it  is  derived.  A 
table  is  submitted  showing  that  under  this  rule  if  A.,  a  resident, 
derived  $1,000  from  each  of  13  different  towns  or  cities,  he 
will  be  required  to  pay  a  tax  of  $367,  because  his  income  is 
aggregated,  and  consequently  becomes  in  large  part  subject 
to  the  higher  rates,  while  if  B.,  a  non-resident,  receives  the 
same  income  from  the  same  sources,  he  will  only  pay  the 
smallest  rate,  i.  e.,  one  per  cent  of  each  $1,000,  amounting  to 
only  $130.  This,  it  is  said,  is  unjust  discrimination  against  the 
residents  of  the  state,  and  deprives  them  of  the  privileges  and 
immunities  which  are  granted  to  the  citizens  of  other  states, 
in  violation  of  the  federal  Constitution.  This  presents  the 
question  whether  such  a  discrimination  can  be  made  between 
residents  and  non-residents,  only  this  time  the  discrimination 
seems  to  be  against  the  resident  and  in  favor  of  the-  non-resi- 
dent. This  question,  also,  we  deem  one  not  necessary  to  be 
decided  now,  and  we  intimate  no  opinion  upon  it.  It  does  not 
seem  that  the  case  will  frequently  arise,  but  if  it  does,  it  can 
BL.INC.TAX.— 3  (33) 


§  16  INCOME    TAXATION  (Ch.  3 

be  then  treated.     We  do  not  regard  it  as  in  any  respect  im- 
portant in  considering  the  validity  of  the  act  as  a  whole." 

§  16.  Federal  Taxation  of  Corporations  Created  by  States 
When  the  constitutionality  of  the  federal  corporation  tax 
law  of  1909  was  attacked  before  the  Supreme  Court  of  the 
United  States,  the  objection  was  very  strongly  urged  that,  for 
the  federal  government  to  impose  a  tax  on  corporations  which 
received  their  franchises  from  the  states  was  beyond  its  right- 
ful authority,  inasmuch  as  it  was  imposing  a  burden  upon  the 
right  of  the  several  states  to  create  corporations,  which  might 
be  pushed  to  such  an  extreme  as  to  destroy  that  right,  and 
hence  an  invasion  of  their  prerogatives,  and  the  crippling  of 
a  power  rightfully  belonging  to  them  as  separate  governments. 
The  act  of  1909  purported  to  lay  a  tax  on  the  privilege  of 
engaging  in  or  carrying  on  business  in  a  corporate  capacity, 
the  amount  of  the  tax  to  be  measured  by  the  net  income  of  the 
corporation.  The  act  of  1913  taxes  the  income  of  corpora- 
tions directly  and  by  name.  But  the  same  argument,  if  it  had 
prevailed  against  the  one  statute,  would  be  equally  potent  as 
against  the  other.  Hence  it  becomes  important  to  consider  the 
decision  of  the  Supreme  Court  in  which  this  argument  was 
tested  and  rejected.20  The  court  said :  "It  is  next  contended 
that  the  attempted  taxation  is  void  because  it  levies  a  tax  upon 
the  exclusive  right  of  a  state  to  grant  corporate  franchises, 
because  it  taxes  franchises  which  are  the  creation  of  the  state 
in  its  sovereign  right  and  authority.  This  proposition  is  rested 
upon  the  implied  limitation  upon  the  powers  of  national  and 
state  governments  to  take  action  which  encroaches  upon  or 
cripples  the  exercise  of  the  exclusive  power  of  sovereignty  in 
the  other.  It  has  been  held  in  a  number  of  cases  that  the  state 
cannot  tax  franchises  created  by  the  United  States  or  the 

20  Flint  v.  Stone  Tracy  Co.,  220  U.  S.  107,  31  Sup.  Ct.  342,  55  L. 
Ed.  389. 

(34) 


Ch.  3)  CONSTITUTIONAL    VALIDITY  §  16 

agencies  or  corporations  which  are  created  for  the  purpose  of 
carrying  out  governmental  functions  of  the  United  States. 
An  examination  of  these  cases  will  show  that  in  each  case 
where  the  tax  was  held  invalid,  the  decision  rested  upon  the 
proposition  that  the  corporation  was  created  to  carry  into  ef- 
fect powers  conferred  upon  the  federal  government  in  its 
sovereign  capacity,  and  the  attempted  taxation  was  an  inter- 
ference with  the  effectual  exercise  of  such  powers.21  *  *  * 
We  must  therefore  enter  upon  the  inquiry  as  to  implied  limi- 
tations upon  the  exercise  of  the  federal  authority  to  tax  be- 
cause of  the  sovereignty  of  the  states  over  matters  within  their 
exclusive  jurisdiction,  having  in  view  the  nature  and  extent  of 
the  power  specifically  conferred  upon  Congress  by  the  Consti- 
tution of  the  United  States.  We  must  remember,  too,  that  the 
revenues  of  the  United  States  must  be  obtained  in  the  same 
territory,  from  the  same  people,  and  excise  taxes  must  be  col- 
lected from  the  same  activities,  as  are  also  reached  by  the 
states  in  order  to  support  their  local  government.  While  the 
tax  in  this  case,  as  we  have  construed  the  statute,  is  imposed 
upon  the  exercise  of  the  privilege  of  doing  business  in  a  cor- 
porate capacity,  as  such  business  is  done  under  the  authority 
of  state  franchises,  it  becomes  necessary  to  consider  in  this 
connection  the  right  of  the  federal  government  to  tax  the  ac- 
tivities of  private  corporations  which  arise  from  the  exercise 
of  franchises  granted  by  the  state  in  creating  and  conferring 
powers  upon  such  corporations.  We  think  it  is  the  result  of 
the  cases  heretofore  decided  in  this  court  that  such  business 
activities,  though  exercised  because  of  state-created  franchises, 
are  not  beyond  the  taxing  power  of  the  United  States.  Taxes 
upon  rights  exercised  under  grants  of  state  franchises  were 


21  Citing  McCulloch  v.  Maryland,  4  Wheat.  316,  4  L.  Ed.  579;  Os- 
born  v.  Bank  of  United  States,  9  Wheat.  738,  6  L.  Ed.  204 ;  Union 
Pac.  R.  Co.  v.  Peniston,  18  Wall.  5,  21  L.  Ed.  787;  California  v. 
Central  Pac.  R.  Co.,  127  U.  S.  1,  8  Sup.  Ct.  1073,  32  L.  Ed.  150. 

(35) 


§  17  INCOME    TAXATION  (Ch.  3 

sustained  by  this  court.22  *  *  *  The  cases  unite  in  ex- 
empting from  federal  taxation  the  means  and  instrumentali- 
ties employed  in  carrying  on  the  governmental  operations  of 
the  state.  The  exercise  of  such  rights  as  the  establishment 
of  a  judiciary,  the  employment  of  officers  to  execute  and  ad- 
minister the  laws,  and  similar  governmental  functions,  cannot 
be  taxed  by  the  federal  government.23  But  this  limitation  has 
never  been  extended  to  the  exclusion  of  the  activities  of  a 
merely  private  business  from  the  federal  taxing  power,  al- 
though the  power  to  exercise  them  is  derived  from  an  act  of 
incorporation  by  one  of  the  states.  We  therefore  reach  the 
conclusion  that  the  mere  fact  that  the  business  taxed  is  done 
in  pursuance  of  authority  granted  by  a  state  in  the  creation  of 
private  corporations  does  not  exempt  it  from  the  exercise  of 
federal  authority  to  levy  excise  taxes  upon  such  privileges. 
*  *  *  Nor  is  the  special  objection  tenable,  made  in  some 
of  the  cases,  that  the  corporations  act  as  trustees,  guardians, 
etc.,  under  the  authority  of  the  laws  or  courts  of  the  state. 
Such  trustees  are  not  the  agents  of  the  state  government  in  a 
sense  which  exempts  them  from  taxation  because  executing 
the  necessary  governmental  powers  of  the  state.  The  trustees 
receive  their  compensation  from  the  interests  served,  and  not 
from  the  public  revenues  of  the  state." 

§  17.     Taxation  of  Income  from  Non-Taxable  Property 

In  passing  upon  the  constitutionality  of  the  United  States 
income  tax  law  of  1894,  the  Supreme  Court  held  that,  in  so  far 
as  the  act  levied  a  tax  upon  the  income  of  persons  or  corpora- 
tions derived  from  the  bonds  of  municipal  corporations,  it  was 

22  Citing  Michigan  Cent.  R.  Co.  v.  Collector,  100  U.  S.  595,  25  L. 
Ed.  647 ;  United  States  v.  Erie  R.  Co.,  106  U.  S.  327,  1  Sup.  Ct.  223, 
27  L.  Ed.  151 ;  Spreckels  Sugar  Ref.  Co.  v.  McClain,  192  U.  S.  397, 
24  Sup.  Ct.  376,  48  L.  Ed.  496. 

2  s  Citing  Collector  v.  Day,  11  Wall.  113,  20  L.  Ed.  122;  United 
States  v.  Baltimore  &  O.  R.  Co.,  17  Wall.  322,  21  L.  Ed.  597 ;  Am- 
brosini  v.  United  States,  187  U.  S.  1,  23  Sup.  Ct  1,  47  L.  Ed.  49. 

(36) 


Ch.  3)  CONSTITUTIONAL   VALIDITY  §  IT 

invalid,  because  such  a  tax  is  a  tax  on  the  power  of  the  states 
and  their  instrumentalities  to  borrow  money,  and  consequently 
repugnant  to  the  constitution.24  A  similar  question  arose  un- 
der the  corporation  excise  tax  law  of  1909,  but  it  was  held 
by  the  same  court  that  the  latter  statute  was  not  invalid  be- 
cause the  income  of  a  corporation  subject  to  the  tax  might 
consist  in  part,  or  even  entirely,  of  interest  on  municipal  bonds, 
the  ground  of  the  distinction  being  that  the  act  of  1909  did  not 
impose  a  tax  on  the  income  so  derived,  but  on  the  franchise  or 
privilege  of  doing  business  in  a  corporate  capacity,  the  income 
being  merely  used  as  the  measure  of  the  amount  of  the  tax 
in  the  particular  case.25  The  act  of  1913  has  reverted  to  the 
principle  of  taxing  incomes  directly,  but  it  meets  the  point  in 
question  by  excluding  from  taxable  income  "interest  upon  the 
obligations  of  a  state  or  any  political  subdivision  thereof." 
It  had  also  been  held  in  an  earlier  case  that  the  act  of  Congress 
of  1864,  imposing  an  income  tax,  and  containing  a  provision 
for  taxing  the  interest  paid  by  railroads  and  some  other  corpo- 
rations on  their  bonded  debt,  requiring  them  to  pay  the  tax 
and  deduct  the  amount  thereof  from  their  periodical  payments 
to  the  holders  of  the  bonds,  could  not  be  applied  in  the  case 
of  a  municipal  corporation  owning  such  bonds,  since  the  mu- 
nicipalities created  by  the  states  are  entirely  beyond  the  tax- 
ing power  of  the  federal  government.26  But  whether  a  state 
may  indirectly  affect  the  borrowing  power  of  another  state  or 
its  municipalities,  by  taxing  its  own  citizens  upon  so  much  of 
their  income  as  is  derived  from  the  bonded  or  other  debt  of 
such  other  state  or  its  municipalities,  is  a  different  question 
altogether.  But  at  least  it  has  been  decided  that  there  is  noth- 

24  Pollock  v.  Farmers'  Loan  &  Trust  Co.,  157  U.  S.  429,  15  Sup. 
Ct.  673,  39  L.  Ed.  759. 

2  5  Flint  v.  Stone  Tracy  Co.,  220  U.  S.  107,  3i  Sup.  Ct.  342,  55  L. 
Ed.  389. 

26  United  States  v.  Baltimore  &  O.  R.  Co.,  17  Wall.  322,  21  L.  Ed. 
597. 

(37) 


§  17  INCOME   TAXATION  (Ch.  3 

ing  in  the  Constitution  of  the  United  States  to  prevent  such 
taxation.27  It  seems  clear,  however,  that  a  state  cannot  law- 
fully tax  either  its  own  citizens  or  non-residents  upon  their 
income  derived  from  its  own  bonds,  when  such  bonds  were 
not  taxable  at  the  time  of  their  issuance,  for  this  would  im- 
pair the  obligation  of  the  contract  implied  in  the  issue  and  sale 
of  the  bonds,  and  more  especially  would  this  be  true  where  the 
legislature  of  the  state  had  covenanted  that  the  bonds  should 
be  free  from  taxation.28  It  must  also  follow  from  the  prin- 
ciple of  the  necessary  independence  of  the  federal  and  state 
governments  that  the  income  tax  law  of  any  state  cannot  in- 
clude interest  on  the  bonds  or  other  public  securities  of  the 
United  States.  And  state  laws  of  this  kind  generally  make 
an  express  exception  as  to  income  derived  from  United  States 
securities,  at  least  where  such  securities  are  declared  to  be  tax- 
exempt  by  act  of  Congress.  But  it  has  been  held  that  the  pos- 
sible impairment  of  the  borrowing  power  of  the  government, 
as  the  remote  effect  of  a  state  statute  imposing  a  tax  upon  the 
transfer  of  a  decedent's  property,  when  the  statute  is  applied 
to  property  consisting  of  United  States  bonds,  is  not  sufficient 
to  render  the  statute  unconstitutional.29  It  should  also  be  re- 
marked, in  this  connection,  that  a  state  tax  upon  the  gross  re- 
ceipts or  the  net  income  of  corporations  or  individuals  cannot 
validly  be  made  to  operate  as  a  restraint  upon  or  interference 
with  interstate  commerce,  and  hence,  in  the  case  of  carriers 
and  other  companies  engaged  in  interstate  as  well  as  domestic 
business,  only  the  receipts  from  domestic  commerce  can  be 
taxed  by  the  state.30 

27  Bonaparte  v.  Tax  Court,  104  U.  S.  592,  26  L.  Ed.  845. 

2  s  Houston  &  T.  C.  R.  Co.  v.  Texas,  177  U.  S.  66,  20  Sup.  Ct.  545, 
44  L.  Ed.  673;  State  Tax  on  Foreign-Held  Bonds,  15  Wall.  300,  21 
L.  Ed.  179 ;  Anton!  v.  Greenhow,  107  U.  S.  769,  2  Sup.  Ct.  91,  27  L. 
Ed.  468. 

2»  Plummer  v.  Cole,  178  U.  S.  115,  20  Sup.  Ct.  829,  44  L.  Ed.  998. 

so  Philadelphia  &  S.  S.  S.  Co.  v.  Pennsylvania,  122  U.  S.  326,  7 
Sup.  Ct.  1118,  30  L.  Ed.  1200 ;  Leloup  v.  Port  of  Mobile,  127  U.  S. 

(38) 


Ch.  3)  CONSTITUTIONAL  VALIDITY  §  18 

§  18.     Taxing  Salaries  of  Federal  and  State  Officers 

The  federal  income  tax  law  of  1913  exempts  "the  compen- 
sation of  all  officers  and  employees  of  a  state  or  any  political 
subdivision  thereof,  except  when  such  compensation  is  paid 
by  the  United  States  Government."  It  would  not  be  compe- 
tent for  Congress  to  lay  a  tax  upon  the  salary  of  an  officer  of 
a  state,  and  this  by  necessary  implication  from  the  constitution 
and  the  mutual  relation  of  the  federal  and  state  governments, 
neither  being  authorized  to  tax  the  means  or  agencies  em- 
ployed by  the  other  in  carrying  out  its  governmental  functions ; 
and  hence  it  was  held  that  a  tax  assessed,  under  the  federal 
income  tax  law  of  1864,  upon  the  salary  of  a  state  judge  was 
wrongfully  imposed,  and  if  paid  under  protest  could  be  recov- 
ered back.31  And  in  a  similar  case  it  was  held  to  be  imma- 
terial that  the  judge's  salary  was  fixed  by  the  authorities  of  a 
county  and  payable  out  of  the  treasury  of  a  city.32  So,  one's 
compensation  as  state's  attorney  is  not  liable  to  the  federal  in- 
come tax,  nor  can  such  compensation  be  applied  to  the  satis- 
faction of  the  monetary  exemption ;  it  must  be  omitted  alto- 
gether from  the  computation  of  his  income,  and  the  taxpayer 
must  have  his  exemption  out  of  his  income  from  other  sourc- 
es.33 And  for  similar  reasons,  it  has  been  held  that  a  stamp 
tax  imposed  by  the  United  States  upon  a  bond  required  by  a 
state  from  an  officer,  as  a  prerequisite  to  the  exercise  of  the 
duties  of  his  office,  is,  in  necessary  legal  effect,  a  tax  upon  the 
officer's  right  to  qualify,  and  upon  the  exercise  by  the  state  of 
its  governmental  functions,  and  therefore  invalid,  and  the  fact 
that  the  tax  is  required  to  be  paid  before  the  officer  has  qual- 
ified is  not  material.34  Conversely,  a  state  income  tax  cannot 
be  made  to  apply  to  the  salary  of  any  officer  of  the  United 

640,  8  Sup.  Ct.  1380,  32  L.  Ed.  311 ;    State  v.  United  States  Fidelity 
&  Guaranty  Co.,  93  Md.  314,  48  Atl.  918. 

si  The  Collector  v.  Day,  11  Wall.  113,  20  L.  Ed.  122. 

32  Freedman  v.  Sigel,  10  Blatchf.  327,  Fed.  Cas.  No.  5,080. 

ss  United  States  v.  Ritchie,  Fed.  Cas.  No.  16,168. 

34  Bettman  v.  Warwick,  108  Fed.  46,  47  C.  C.  A.  185. 

(39) 


§  18  INCOME    TAXATION  (Cll.  3 

States  government.35  "It  is  considered  as  settled  that  the 
state  has  no  power  to  tax  an  officer  of  the  United  States,  or 
vice  versa,  because  the  power  to  tax  includes  the  power  to 
destroy,  and  if  a  state  were  allowed  to  tax  a  United  States  of- 
ficer one  dollar,  it  might  tax  him  to  the  full  amount  of  his  sal- 
ary, and  thus  arrest  all  the  measures  of  the  government.  And 
so  the  United  States  cannot  tax  a  state  officer  for  the  same 
reason."  36  The  only  state  income  tax  law  now  in  force  which 
explicitly  recognizes  this  limitation  is  that  of  Wisconsin,  which 
allows  a  deduction  from  taxable  income  of  "salaries  or  other 
compensation  received  from  the  United  States  by  officials 
thereof."  37  But  a  similar  exception  must  be  read  by  neces- 
sary implication  into  the  laws  of  any  other  state  where  the 
question  might  arise.  Therefore  all  federal  officers,  such  as 
postmasters,  internal  revenue  officers,  district  attorneys,  offi- 
cers of  the  land  department,  and  United  States  judges  resident 
within  the  state,  must  be  understood  to  be  exempt  from  the 
state  income  tax,  in  so  far  as  relates  to  their  salary  or  com- 
pensation from  the  United  States,  though,  if  such  officers  have 
an  income  derived  from  other  sources,  it  is  subject  to  the 
tax,  as  there  is  nothing  in  their  official  character  to  exempt 
their  private  means  from  state  taxation.  And  it  should  be  ob- 
served that  the  licensing  of  a  merchant  under  the  United 
States  revenue  laws  does  not  render  him  an  "officer"  of  the 
federal  government,  nor  withdraw  him  from  the  taxing  power 
of  the  state.38  And  although  the  salary  of  an  officer  in  the 
United  States  army  cannot  be  taxed  by  a  state  or  municipality, 
yet  his  personal  property,  such  as  household  furniture,  is  not 
exempt  from  such  taxation,39  and  of  course  the  same  prin- 
ciple would  apply  to  his  investments  or  the  income  derived 

86  Purnell  v.  Page,  133  N.  C.  125,  45  S.  E.  534. 
36  King  v.  Hunter,  65  N.  C.  603,  613. 

«T  Wisconsin  Income  Tax  Law,  1911,  §  1087in,  4,  f.     See  this  stat- 
ute in  full  in  the  Appendix, 
as  State  v.  Bell,  61  N.  C.  76. 
39  Finley  v.  City  of  Philadelphia,  32  Pa.  St.  381. 

(40) 


Ch.  3)  CONSTITUTIONAL   VALIDITY  §  18 

therefrom.  And  it  has  been  held  in  Massachusetts  that  money 
which  one  has  on  deposit  in  a  bank  is  not  exempt  from  taxa- 
tion because  it  was  derived  from  his  salary  as  a  federal  offi- 
cer, for  it  loses  its  identity  as  salary  when  it  has  been  paid  to 
him  and  come  into  his  possession.40 

As  to  the  incidence  of  federal  taxation  upon  federal  offi- 
cers, it  should  be  observed  that  there  are  some  whose  salary, 
while  it  is  to  be  fixed  and  appropriated  by  Congress,  is  safe- 
guarded from  change  during  their  tenure  of  office  by  the  con- 
stitution itself.  As  to  the  President,  he  is  to  "receive  a  com- 
pensation which  shall  neither  be  increased  nor  diminished  dur- 
ing the  period  for  which  he  shall  have  been  elected."  (Const. 
U.  $.,  art.  2,  §  1.)  And  as  to  the  federal  judges,  they  shall 
"receive  a  compensation  which  shall  not  be  diminished  during 
their  continuance  in  office."  (Const.  U.  S.,  art.  3,  §  1.)  The 
income  tax  laws  enacted  by  Congress  during  the  period  of  the 
Civil  War  contained  no  such  exception.  But  the  justices  of 
the  Supreme  Court,  through  Chief  Justice  Taney,  addressed 
a  communication  to  the  Secretary  of  the  Treasury  declaring 
their  conviction  that  their  salaries  were  not  legally  subject  to 
the  tax.  Thereupon  the  Attorney  General,  to  whom  the  com- 
munication had  been  referred,  gave  an  elaborate  opinion,  ad- 
vising the  Secretary  of  the  Treasury  that  the  income  tax  could 
not  lawfully  be  assessed  upon  and  collected  from  the  salaries 
of  those  judicial  officers  of  the  United  States  who  were  in 
office  at  the  time  of  the  enactment  of  the  statute  imposing  the 
tax.41  No  attempt  was  made  thereafter  to  assess  the  tax  upon 
the  salaries  of  the  judges.  But  in  the  income  tax  law  of  1894, 
Congress  again  failed  to  make  an  exception  in  this  particular, 
and  the  statute  was  held  unconstitutional  and  void  in  so  far  as 
it  attempted  to  tax  the  salaries  of  the  judges  of  the  United 
States  courts.42  But  the  act  of  1913  meets  this  point  by  pro- 

40  Dyer  v.  City  of  Melrose,  197  Mass.  99,  83  N.  E.  6. 

41  13  Op.  Atty.  Gen.  161. 

42  Pollock  v.  Farmers'  Loan  &  Trust  Co.,  157  U.  S.  429,  15  Sup. 
Ct  673,  39  L.  Ed.  759,  per  Field,  J.,  concurring. 

(41) 


§  18  INCOME   TAXATION  (Ch.  3 

viding  that  "in  computing  net  income  under  this  section  there 
shall  be  excluded  *  *  the  compensation  of  the  present  Pres- 
ident of  the  United  States  during  the  term  for  which  he  has 
been  elected,  and  of  the  judges  of  the  supreme  and  inferior 
courts  of  the  United  States  now  in  office,"  the  evident  inten- 
tion being  that  the  next  President  of  the  United  States,  and 
all  federal  judges  appointed  after  the  enactment  of  the  stat- 
ute, shall  be  subject  to  the  income  tax  in  respect  to  their  sal- 
aries.43 

But  as  to  all  the  other  officers  and  employes  of  the  United 
States  (including  the  members  of  Congress  themselves)  whose 
salary  or  compensation  may  be  fixed  and  changed  in  the  ab- 
solute discretion  of  Congress,  there  is  no  constitutional  ob- 
jection to  the  incidence  of  the  income  tax  upon  such  salaries. 
Such  was  the  decision  made  under  the  act  of  1862  in  regard  to 
collecting  the  income  tax  from  the  salary  of  an  officer  in  the 

43  An  interesting  question  might  here  be  raised  as  to  the  effect  of 
this  provision  on  the  power  of  Congress  hereafter  to  repeal  the  in- 
come tax  law  or  to  change  the  rate  of  taxation  under  it.  For  if  the 
imposition  of  the  income  tax  upon  the  salary  of  the  President  would 
"diminish"  it,  within  the  meaning  of  the  constitution  (and  that  is 
the  only  possible  legal  reason  for  excepting  the  present  incumbent), 
then  the  repeal  of  the  act  would  as  certainly  "increase"  the  com- 
pensation of  any  future  President  to  whose  salary  it  had  attached  at 
the  beginning  of  his  term,  which  is  equally  forbidden  by  the  consti- 
tution. And  if  a  President  shall  be  elected  while  the  present  stat- 
ute is  in  force,  any  change  in  the  rate  of  taxation,  effected  by 
amendment  of  the  act,  would  either  increase  or  diminish  his  com- 
pensation, as  the  case  might  be.  And  the  same  considerations  apply 
to  taxing  the  federal  judges,  except  that  their  salaries  may  be  in- 
creased, but  not  diminished,  during  their  continuance  in  office.  It 
would  therefore  appear  to  follow,  as  a  perfectly  logical  conclusion, 
though  an  almost  absurd  result,  that  if  a  future  Congress  should  de- 
sire to  increase  the  rate  of  income  taxation,  it  would  have  to  make 
an  explicit  exception  as  to  the  President  and  the  federal  judges,  who 
would  then  continue  to  be  taxed  at  a  different  rate  from  other  citi- 
zens ;  and  if  it  were  desired  to  repeal  the  act,  the  President  alone 
must  be  required  to  continue  paying  the  tax  until  the  expiration  of 
his  term  of  office.  Of  course  these  complexities  could  have  been 
avoided  by  the  simple  means  of  absolutely  excepting  these  officers 
from  the  operation  of  the  statute. 

(42) 


<Jh.  3)  CONSTITUTIONAL   VALIDITY  §  18 

United  States  army,44  and  the  rule  is  equally  applicable  to  all 
others  save  those  mentioned  in  the  preceding  paragraph. 

We  have  next  to  consider  the  application  of  a  state  income 
tax  law  to  the  salaries  of  the  state  officers.  Here  also  the 
principle  applies  that  if  the  constitution  of  the  state  protects 
such  salaries  from  change  during  the  incumbency  of  the  par- 
ticular officer,  it  prevents  their  being  taxed  as  income.  Thus 
in  North  Carolina,  "it  is  provided  in  the  constitution  that  the 
salaries  of  the  most  important  officers  shall  not  be  altered  dur- 
ing their  term  of  office,  and  this  is  understood  to  exempt  their 
salaries  from  taxation,  because  to  tax  is  to  diminish,  or  it  may 
be  to  destroy."  45  Hence  if  the  local  constitution  provides 
that  the  salaries  of  the  judges  of  the  state  shall  not  be  dimin- 
ished during  their  continuance  in  office,  such  salaries  are  ex- 
empt from  the  income  tax.46  "It  may  be  that  the  restriction 
in  this  article  [of  the  constitution]  upon  the  power  of  the  leg- 
islature refers  principally  to  the  diminution  of  the  salaries 
of  the  judges  by  a  law  fixing  it  at  a  less  amount  than  that  es- 
tablished at  the  epoch  of  their  entrance  into  office.  The  ob- 
ject, however,  of  this  article  was  to  secure  the  independence 
of  the  judiciary.  If  the  legislature  can  tax  the  salaries,  it 
would  be  deprived  of  its  plenary  effect."  4T  The  only  de- 
cision to  the  contrary  was  made  in  an  early  case  in  Pennsyl- 
vania, which,  however  much  it  may  be  respected  at  home,  is 
not  entitled  to  much  persuasive  effect  elsewhere,  in  view  of  its 
opposition  to  the  general  current  of  authority.48  But  unless 

44  Galm  v.  United  States,  39  Ct.  01.  55. 

*  5  King  v.  Hunter,  65  N.  C.  603;  In  re  Taxation  of  Salaries  of 
Judges,  131  N.  C.  692,  42  S.  E.  970. 

46  Purnell  v.  Page,  133  N.  C.  125,  45  S.  E.  534;   In  re  Taxation  of 
Salaries  of  Judges,  131  N.  C.  692,  42  S.  E.  970 ;    Robertson  v.  Pratt, 
13  Hawaii,  590. 

47  City  of  New  Orleans  v.  Lea,  14  La.  Ann.  197. 

48  Northumberland  v.  Chapman,  2  Rawle  (Pa.)  73.    In  this  case  it 
was  said  by  Chief  Justice  Gibson:    "As  the  constitution,  like  every 
other  instrument,  is  to  have  a  reasonable  interpretation,  the  prohibi- 
tion in  question  is  to  be  restrained  to  laws  which  have  such  a  reduc- 

(43) 


§  18  INCOME    TAXATION  (Ch.  3 

thus  restrained  by  some  explicit  provision  of  the  state  con- 
stitution, it  is  within  the  lawful  power  of  the  state  legislature 
to  make  an  income  tax  law  apply  to  the  salaries  of  the  various 
officers  of  the  state  and  of  its  municipalities,49  as  is  done  in 
Wisconsin  in  all  cases  where  such  taxation  would  not  be  "re- 
pugnant to  the  constitution."  It  should  be  remembered  that 
public  office  is  not  a  "contract,"  within  the  sense  of  the  con- 
stitutional prohibition  against  laws  impairing  the  obligation 
of  contracts.  And  hence  no  contract  is  violated  by  the  im- 
position of  an  income  tax  upon  the  salary  of  an  officer  who 
was  in  office  and  whose  compensation  was  fixed  by  law,  at  the 
time  the  income  tax  law  came  into  effect ;  for  his  right  to  the 
compensation  grows  out  of  the  rendition  of  services,  and  not 
out  of  any  contract  between  the  government  and  the  officer 
that  the  services  shall  be  rendered  and  the  compensation  paid.50 
Finally,  an  income  tax  law  is  not  to  be  pronounced  uncon- 


tion  for  their  object,  and  not  for  their  consequence.  On  any  other 
principle  of  construction,  a  tax  could  not  be  constitutionally  assessed 
on  property  purchased  with  money  drawn  from  a  judge's  salary, 
which  would,  in  reason,  have  as  fair  a  claim  to  exemption  as  the  sal- 
ary itself.  If  we  once  get  away  from  the  plain  inartificial  import 
of  the  prohibition,  it  is  not  easy  to  tell  at  what  stage  of  refinement 
we  shall  stop.  The  object  of  the  legislature  was  to  apportion  the 
public  burden  according  to  the  ratio  of  property,  and  to  produce  in 
detail  a  result  approaching  as  near  as  possible  to  that  of  an  income 
tax,  a  measure  of  assessment  more  equable  in  the  abstract  than  any 
other  that  could  be  proposed.  Now  there  is  no  reason  to  exempt  a 
judge  from  contribution  which  is  not  just  as  applicable  to  any  other 
officer  who  presents  no  tangible  surface  but  his  office  to  the  revenue 
laws,  nor  was  the  object  of  the  prohibition  to  place  him  in  this  re- 
spect on  higher  ground.  The  legislature  could  not  constitutionally 
retrench  a  part  of  a  judge's  salary  under  the  pretext  of  assessing  a 
tax  on  it ;  but,  for  the  bona  fide  purpose  of  contribution,  a  reason- 
able portion  of  it,  like  any  other  part  of  his  property,  may  be  ap- 
plied to  the  public  exigencies." 

4»  In  re  Taxation  of  Salaries  of  Judges,  131  N.  C.  692.  42  S.  E. 
970. 

so  See  Butler  v.  Pennsylvania,  10  How.  402,  13  L.  Ed.  472 ;  Smith 
v.  City  of  New  York,  37  N.  Y.  518;  Conner  v.  City  of  New  York,  5 
N.  Y.  285. 

(44) 


Ch.  3)  CONSTITUTIONAL   VALIDITY  §  19 

stitutional  and  void  in  its  entirety  simply  because  it  lays  a  tax 
upon  the  salaries  of  certain  officers  who  are  constitutionally 
exempt  from  such  taxation,  or  fails  to  make  an  explicit  ex- 
ception in  their  favor.  The  protection  of  the  constitution  be- 
cause of  such  an  illegal  provision  can  be  invoked  only  by  one 
against  whom  it  is  sought  to  be  enforced ;  and  even  in  such  a 
case,  if  the  law  in  affirmative  terms  lays  the  tax  on  such  an  ex- 
empt income,  that  portion  of  it  can  be  exscinded  without  de- 
stroying the  rest,  while,  if  it  merely  omits  to  make  the  neces- 
sary exception,  it  can  be  construed  as  not  applying  in  the  par- 
ticular case.51 

§  19.     Exemption  of  Incomes  Below  a  Fixed  Sum 

It  has  been  held  by  a  great  many  authorities  that  a  statute 
imposing  taxes  on  inheritances,  legacies,  and  successions  is 
not  unconstitutional  because  it  exempts  from  its  operation 
estates  or  inheritances  below  a  certain  minimum  value,52  pro- 
vided only  that  the  exemption  is  not  so  excessive  as  to  be  en- 
tirely unreasonable.53  On  the  same  principle,  an  income  tax 
law  is  not  unconstitutional  because  it  wholly  exempts  from 

01  State  v.  Frear,  148  Wis.  456,  134  N.  W.  673,  26  Am.  &  Eng.  Ann. 
Gas.  1147 ;  Peacock  v.  Pratt,  121  Fed.  772,  58  C.  C.  A.  48 ;  Robert- 
son v.  Pratt,  13  Hawaii,  590. 

62  Knowlton  v.  Moore,  178  U.  S.  60,  20  Sup.  Ct.  755,  44  L.  Ed.  977 ; 
Magoun  v.  Illinois  Trust  &  Sav.  Bank,  170  U.  S.  283,  18  Sup.  Ct.  594, 
42  L.  Ed.  1037;  Colton  v.  Montpelier,  71  Vt  413,  45  Atl.  1039;  In 
re  Hickok's  Estate,  78  Vt.  259,  62  Atl.  724 ;  In  re  Wilmerding's  Es- 
tate, 117  Cal.  281,  49  Pac.  181 ;  State  v.  Vance,  97  Minn.  532,  106  N. 
W.  98 ;  State  v.  Bazille,  97  Minn.  11,  106  N.  W.  93 ;  Black  v.  State, 
113  Wis.  205,  89  N.  W.  522;  State  v.  Guilbert,  70  Ohio  St.  299,  71 
N.  E.  636 ;  Gelsthorpe  v.  Furnell,  20  Mont.  299,  51  Pac.  267 ;  State 
v.  Alston,  94  Tenn.  674,  30  S.  W.  750,  28  L.  R.  A.  78 ;  In  re  Mixter's 
Estate,  10  Pa.  Co.  Ct.  R.  409. 

ss  Minot  v.  Winthrop,  162  Mass.  113,  38  N.  E.  512,  26  L.  R.  A.  259, 
in  which  case  it  was  held  that  an  excise  tax  on  inheritances  was 
not  so  clearly  unreasonable,  by  reason  of  exempting  estates  under 
$10,000,  as  to  render  it  unconstitutional.  But  see  State  v.  Ferris,  9 
Ohio  Cir.  Ct.  R.  298,  holding  void  an  inheritance  tax  law  which  ex- 
empted property  to  the  amount  of  $20,000. 

(45) 


§  19  INCOME    TAXATION  (Ch.   3 

taxation  all  incomes  below  a  certain  annual  amount,  and  the 
question  where  the  tax  shall  begin,  or  where  the  exemption 
shall  end,  is  one  exclusively  for  the  decision  of  the  legisla- 
ture.54 Such  a  tax  law,  making  a  reasonable  exemption,  is 
not  in  violation  of  a  constitutional  provision  that  taxes  shall 
be  equal  and  uniform.55  And  if  it  is  at  all  within  the  power 
of  a  court  to  adjudge  that  the  exemption  granted  is  so  ex- 
cessive as  to  invalidate  the  statute,  at  least  no  such  decision 
has  ever  yet  been  rendered.  On  the  contrary,  the  decisions 
have  sustained  the  income  tax  laws  in  this  particular.  That 
of  Hawaii,  exempting  incomes  to  the  amount  of  $1,000,  was 
sustained  as  against  the  objection  that  the  allowance  was 
excessive.56  That  of  Wisconsin  was  similarly  held  valid,  al- 
though it  exempts  life  insurance  to  the  amount  of  $10,000, 
in  favor  of  one  legally  dependent  on  the  deceased.  The  court 
called  this  a  "striking  exemption,"  but  said:  "While  this  is 
somewhat  large,  we  cannot  say  that  it  is  unreasonable."  57 
The  income  tax  act  of  Congress  of  1894  was  sustained  (by 
an  inferior  court)  as  against  objection  that  the  exemption  al- 
lowed, $4,000,  was  unreasonably  great.58  The  corporation  ex- 
cise tax  law  of  1909  was  assailed  on  the  ground  that  it  exempt- 
ed incomes  of  less  than  $5,000,  but  the  Supreme  Court  of  the 
United  States  answered  this  objection  with  a  mere  reference 
to  certain  of  its  earlier  decisions  concerning  similar  exemp- 
tions in  inheritance  tax  law.59 

Through  no  decision  on  this  precise  point  was  rendered  in 
the  case  before  the  United  States  Supreme  Court  involving 
the  validity  of  the  act  of  Congress  of  1894,  yet  some  of  the 

s*  Moore  v.  Miller,  5  App.  D.  C.  413 ;  New  Orleans  v.  Fourchy,  30 
La.  Ann.  910. 

SB  New  Orleans  v.  Fourchy,  30  La.  Ann.  910. 
se  Robertson  v.  Pratt,  13  Hawaii,  590. 

57  State  v.  Frear,  148  Wis.  456,  134  N.  W.  673,  26  Am.  &  Eng.  Ann. 
Cas.  1147. 

58  Moore  v.  Miller,  5  App.  D.  C.  413. 

59  Flint  v.  Stone  Tracy  Co.,  220  U.  S.  107,  31  Sup.  Ct.  342,  55  L. 
Ed.  389. 

(46) 


Ch.  3)  CONSTITUTIONAL   VALIDITY  §  19 

separate  opinions  filed  in  that  case  contain  valuable  discussions 
both  of  the  general  question  of  exempting  small  incomes  and 
of  the  limits  of  the  authority  of  the  courts  in  deciding  upon 
the  reasonableness  of  the  exemption.  Thus,  in  one  of  the 
opinions  it  was  said :  "A  tax  which  is  wanting  in  uniformity 
among  members  of  the  same  class  is  or  may  be  invalid.  But 
this  does  not  deprive  the  legislature  of  the  power  to  make 
exemptions,  provided  such  exemptions  rest  upon  some  prin- 
ciple, and  are  not  purely  arbitrary,  or  created  solely  for  the 
purpose  of  favoring  some  person  or  body  of  persons.  Thus 
in  every  civilized  country  there  is  an  exemption  of  small  in- 
comes, which  it  would  be  manifest  cruelty  to  tax,  and,  the' 
power  to  make  such  exemptions  once  granted,  the  amount  is 
within  the  discretion  of  the  legislature,  and  so  long  as  that 
power  is  not  wantonly  abused,  the  courts  are  bound  to  respect 
it.  In  this  law  there  is  an  exemption  of  $4,000,  which  indi- 
cates a  purpose  on  the  part  of  Congress  that  the  burden  of 
this  tax  should  fall  on  the  wealthy,  or  at  least  upon  the  well- 
to-do.  If  men  who  have  an  income  or  property  beyond  their 
pressing  needs  are  not  the  ones  to  pay  taxes,  it  is  difficult  to 
say  who  are ;  in  other  words,  enlightened  taxation  is  imposed 
upon  property  and  not  upon  persons.  Poll  taxes,  formerly 
a  considerable  source  of  revenue,  are  now  practically  obsolete. 
The  exemption  of  $4,000  is  designed,  undoubtedly,  to  cover 
the  actual  living  expenses  of  the  large  majority  of  families, 
and  the  fact  that  it  is  not  applied  to  corporations  is  explained 
by  the  fact  that  corporations  have  no  corresponding  expenses. 
The  expenses  of  earning  their  profits  are  of  course  deducted 
in  the  same  manner  as  the  corresponding  expenses  of  a  private 
individual  are  deductible  from  the  earnings  of  his  business. 
The  moment  the  profits  of  a  corporation  are  paid  over  to  the 
stockholders,  the  exemption  of  $4,000  attaches  to  them  in  the 
hands  of  each  stockholder."  60  And  in  another  opinion  in 

eo  Dissenting  opinion  of  Brown,  J.,  in  Pollock  v.  Farmers'  Loan  & 
Trust  Co.,  158  U.  S.  601,  15  Sup.  Ot.  912,  39  L.  Ed.  1108. 

(47) 


§  19  INCOME    TAXATION  (  Ch.  3 

the  same  case  it  was  said:  "In  this  connection,  and  as  a 
ground  for  annulling  the  provisions  taxing  incomes,  counsel 
for  the  appellant  refers  to  the  exemption  of  incomes  that  do 
not  exceed  $4,000.  It  is  said  that  such  an  exemption  is  too 
large  in  amount.  That  may  be  conceded.  But  the  court  can- 
not for  that  reason  alone  declare  the  exemption  to  be  invalid. 
Every  one,  I  take  it,  will  concede  that  Congress,  in  taxing 
incomes,  may  rightfully  allow  an  exemption  to  some  amount. 
This  was  done  in  the  income  tax  laws  of  1861  and  in  subse- 
quent laws  and  was  never  questioned.  Such  exemptions  rest 
upon  grounds  of  public  policy,  of  which  Congress  must  judge, 
and  of  which  this  court  cannot  rightfully  judge;  and  that 
determination  cannot  be  interfered  with  by  the  judicial  branch 
of  the  government,  unless  the  exemption  is  of  such  a  char- 
acter and  is  so  unreasonably  large  as  to  authorize  the  court 
to  say  that  Congress,  under  the  pretence  merely  of  legislating 
for  the  general  good,  has  put  upon  a  few  persons  burdens 
that,  by  every  principle  of  justice  and  under  every  sound  view 
of  taxation,  ought  to  have  been  placed  upon  all  or  upon  the 
great  mass  of  the  people.  If  the  exemption  had  been  placed 
at  $1,500,  or  even  $2,000,  few,  I  think,  would  have  contended 
that  Congress,  in  so  doing,  had  exceeded  its  powers.  In  view 
of  the  increased  cost  of  living  at  this  day,  as  compared  with 
other  times,  the  difference  between  either  of  those  amounts 
and  $4,000  is  not  so  great  as  to  justify  the  courts  in  striking 
down  all  of  the  income  tax  provisions.  The  basis  upon  which 
such  exemptions  rest  is  that  the  general  welfare  requires  that, 
in  taxing  incomes,  such  exemptions  should  be  made  as  will 
fairly  cover  the  annual  expenses  of  the  average  family,  and 
thus  prevent  the  members  of  such  families  becoming  a  charge 
upon  the  public.  The  statute  allows  corporations,  when  mak- 
ing returns  of  their  net  profits  or  income,  to  deduct  actual 
operating  or  business  expenses.  Upon  like  grounds,  as  I  sup- 
pose, Congress  exempted  incomes  under  $4,000."  61  In  an- 

ei  Dissenting  opinion  of  Harlan,  J.,  in  Pollock  v.  Farmers'  Loan  & 
Trust  Co.,  supra. 

(48) 


Ch.  3)  CONSTITUTIONAL   VALIDITY  §  20 

other  case,  in  construing  a  territorial  income  tax  law,  the 
court  observed:  "It  is  contended  that  the  exemption  of  in- 
comes to  the  extent  of  $1,000  is  an  illegal  discrimination.  The 
power  of  state  legislatures  to  grant  reasonable  exemptions 
from  taxation  is  undisputed.  It  has  been  upheld  on  grounds 
of  enlightened  public  policy — a  public  policy  which  seeks  to 
exclude  from  taxation  the  living  expenses  of  the  average 
family,  and  thus  to  enable  the  poor  man  to  escape  becoming 
a  public  burden.  It  rests  upon  the  theory  that  the  exemp- 
tion results  in  ultimate  benefit  to  the  taxpayer,  which  compen- 
sates him  for  the  additional  burden  of  taxation  which  he  is 
thereby  called  upon  to  bear.  It  does  not  apply  to  corporations, 
for  the  reason  that  they  have  no  corresponding  expense.  But 
the  exemption  must  be  reasonable  and  impartial,  and  must  be 
extended  to  all  who  are  similarly  situated.  It  is  urged  that  the 
exemption  in  question  is  unreasonable.  If  the  power  to  make 
exemptions  be  once  conceded,  the  amount  of  the  exemption 
is  largely  within  the  discretion  of  the  legislature — a  discretion 
which  is  not  subject  to  review  in  the  courts  unless  it  be  clearly 
shown  to  have  been  abused."  62 

§  20.     Exemption  of  Classes  of  Individuals  or  Corporations 

It  is  a  conceded  principle  of  taxation,  applicable  to  income 
taxes  as  well  as  to  any  others,  that  there  is  no  constitutional 
objection  to  an  exemption  in  favor  of  those  corporations  or 
institutions  which  serve  important  public  purposes  or  confer 
benefits  upon  the  public  at  large,  such  as  religious,  educational, 
and  charitable  organizations.  Also  it  is  clear  that  any  corpo- 
ration which  bears  its  due  share  of  the  public  burden,  under 
a  special  form  of  taxation,  may  lawfully  be  exempted  from 
the  payment  of  any  or  all  other  taxes.  Thus,  the  exemption 
of  insurance  companies  from  an  income  tax  law  does  not 
render  it  invalid  as  to  other  corporations  which  are  made 
subject  to  the  law,  where  the  exemption  is  made  expressly  on 

02  Peacock  v.  Pratt,  121  Fed.  772,  58  C.  C.  A.  48. 

BL.INC.TAX. — 4  (49) 


§  20  INCOME   TAXATION  (Ch.  3 

the  ground  that  such  companies  are  required  by  another  law 
to  pay  a  tax  on  the  premiums  received.63  But  beyond  these 
elementary  principles,  the  subject  is  not  free  from  doubt.  It 
would  be  obviously  contrary  to  sound  principles  of  constitu- 
tional law  to  push  the  power  of  exemption  so  far  as  to  make 
the  burden  of  the  tax  in  reality  fall  upon  a  selected  class  of 
individuals  or  corporations.  On  this  point  the  Supreme  Court 
of  Louisiana  has  said :  "It  is  not  necessary  for  us  to  decide 
whether  or  not,  under  the  constitution,  the  legislature  has 
power  to  levy  an  income  tax.  It  suffices  to  say  that,  if  the 
legislature  has  such  power,  it  would  be  an  indispensable  con- 
dition of  its  exercise  that  the  tax  should  embrace  the  incomes 
ot  all  persons  not  exempted,  and  whatever  power  of  classifi- 
cation the  legislature  might  possess  as  to  the  subject-matter 
of  taxation,  that  power  could  under  no  pretext  be  stretched 
so  as  to  embrace  the  right  to  single  out  a  particular  class  of 
taxpayers  and  to  require  them  to  pay  such  a  tax,  while  ex- 
empting all  others."  64  No  such  sweeping  exemptions  have 
been  attempted  in  recent  income  tax  laws.  But  they  com- 
monly contain  exemptions  in  favor  of  labor  organizations, 
agricultural  societies,  savings  banks,  mutual  building  and  loan 
associations,  mutual  insurance  companies,  fraternal  orders 
and  benefit  societies  (or  some  of  the  foregoing),  as  well  as 
charitable  and  educational  institutions.  The  validity  of  such 
exemptions  has  been  severely  criticized.  Thus,  in  one  of  the 
opinions  filed  in  the  Pollock  case,  it  was  said :  "Exemptions 
from  the  operation  of  a  tax  always  create  inequalities.  Those 
not  exempted  must,  in  the  end,  bear  an  additional  burden  or 
pay  more  than  their  share.  A  law  containing  arbitrary  exemp- 
tions can  in  no  just  sense  be  termed  uniform.  In  my  judg- 
ment, Congress  has  rightfully  no  power,  at  the  expense  of 
others,  owning  property  of  the  like  character,  to  sustain  pri- 
es Peacock  v.  Pratt,  121  Fed.  772,  58  C.  C.  A.  48. 
6*  Parker  v.  North  British  &  M.  Ins.  Co.,  42  La.  Ann.  428,  7  South. 
599. 

(50) 


Ch.  3)  CONSTITUTIONAL  VALIDITY  §  21 

vate  trading  corporations,  such  as  building  and  loan  associa- 
tions, savings  banks,  and  mutual  life,  fire,  marine,  and  acci- 
dent insurance  companies,  formed  under  the  laws  of  the  va- 
rious states,  which  advance  no  national  purpose  or  public 
interest,  and  exist  solely  for  the  pecuniary  profit  of  their 
members."  65  But  in  a  more  recent  case  the  Supreme  Court 
of  the  United  States  has  apparently  given  its  approval  to 
the  validity  of  just  such  exemptions  as  those  mentioned.  In 
refusing  to  hold  unconstitutional  the  corporation  tax  law  of 
1909,  on  the  ground  that  it  taxed  a  business  when  carried  on 
by  a  corporation,  and  exempted  a  similar  business  when  car- 
ried on  by  a  partnership  or  a  private  individual,  it  said :  "In 
levying  excise  taxes  the  most  ample  authority  has  been  recog- 
nized from  the  beginning  to  select  some  and  omit  other  possi- 
ble subjects  of  taxation,  to  select  one  calling  and  omit  another, 
to  tax  one  class  of  property  and  to  forbear  to  tax  another." 
And  later  in  the  same  opinion  it  was  said:  "As  to  the  objec- 
tion that  certain  organizations, — labor,  agricultural,  and  hor- 
ticultural,— fraternal  and  benevolent  societies,  loan  and  build- 
ing associations,  and  those  for  religious,  charitable,  or  educa- 
tional purposes,  are  excepted  from  the  operation  of  the  law, 
we  find  nothing  in  it  to  invalidate  the  tax.  As  we  have  had 
frequent  occasion  to  say,  the  decisions  of  this  court  from  an 
early  date  to  the  present  time  have  emphasized  the  right  of 
Congress  to  select  the  objects  of  excise  taxation,  and  within 
this  power  to  tax  some  and  leave  others  untaxed  must  be 
included  the  right  to  make  exemptions  such  as  are  found  in 
this  act."  6e 

§  21.    Allowance  of  Deduction  for  Other  Taxes  Paid 

The  Wisconsin  income  tax  law  contains  a  provision  that 
"any  person  who  shall  have  paid  a  tax  upon  his  personal  prop- 

« s  Pollock  v.  Farmers'  Loan  &  Trust  Co.,  157  IT.  S.  429,  15  Sup. 
Ct  673,  39  L.  Ed.  759,  per  Field,  J.,  concurring. 

66  Flint  v.  Stone  Tracy  Co.,  220  U.  S.  107,  31  Sup.  Ct  342,  55  L. 
Ed.  389. 

(51) 


§  22  INCOME   TAXATION  (Ch.  3 

erty  during  any  year  shall  be  permitted  to  present  the  receipt 
therefor  to,  and  have  the  same  accepted  by,  the  tax  collector 
to  its  full  amount  in  the  payment  of  taxes  due  upon  the  in- 
come of  such  person  during  said  year."  67  When  the  consti- 
tutionality of  the  statute  was  under  consideration  by  the  Su- 
preme Court  of  the  state,  an  objection  against  its  validity  was 
urged  on  the  ground  that  this  provision  created  an  unjust  and 
unlawful  discrimination  between  taxpayers  all  equally  sub- 
ject to  the  law,  since  one  taxpayer  might  be  required  to  pay 
the  whole  of  the  income  tax  assessed  against  him,  while  anoth- 
er, having  an  exactly  equal  income,  could  have  the  tax  thereon 
very  materially  reduced  by  taking  advantage  of  this  provision. 
But  the  court  held  that  the  objection  was  without  force  and 
overruled  it.68 

§  22.     Double  Taxation 

Vigorous  objections  to  the  validity  of  income  tax  laws  have 
been  based  on  the  ground  that  they  impose,  or  at  least  result 
in,  double  taxation.  And  it  cannot  be  denied  that  this  is  usu- 
ally the  case.  "It  may  safely  be  said  that  the  payment  of  an 
income  tax  almost  necessarily  involves,  in  some  indirect  and 
limited  sense,  the  payment  of  a  double  tax.  For  income,  often- 
er  than  otherwise,  in  some  way,  either  directly  or  indirectly,  is 
derived  from  or  grows  out  of  property  subject  to  taxation."  69 
But  though  double  taxation  is  vicious  and  unjust  in  principle, 
and  no  statute  will  be  so  construed  as  to  impose  double  taxes 
if  it  can  reasonably  be  avoided,70  yet  a  statute  which  produces 
this  result  cannot  be  adjudged  invalid  on  economic  principles, 
nor  unless  it  conflicts  with  some  explicit  provision  of  the  con- 
stitution. This  important  point  is  discussed,  in  relation  to  in- 

«*  Wisconsin  Income  Tax  Law,  1911,  §  1087m,  26. 
88  State  v.  Frear,  148  Wis.  456,  134  N.  W.  673,  26  Am.  &  Eng.  Ann. 
Cas.  1147. 

e»  Lott  v.  Hubbard,  44  Ala.  593. 

TO  Black,  Const  Law  (3d  edn.)  p.  464, 

(52) 


Ch.  3)  CONSTITUTIONAL  VALIDITY  §  22 

come  taxation,  by  the  court  in  South  Carolina,  in  the  following 
terms:  "The  next  objection  to  the  act  is  that  it  results  in 
double  taxation.  The  contention  is  that  plaintiff's  income  was 
derived  from  dividends  received  upon  his  stock  in  corpora- 
tions chartered  and  doing  business  under  the  laws  of  the  state, 
and  as  these  corporations  had  paid  taxes  on  their  property, 
and  also  on  their  franchises,  a  tax  on  plaintiff's  income  is 
double  taxation.  There  is  much  room  for  discussion  and  dif- 
ference of  opinion  as  to  what  really  amounts  to  double  taxa- 
tion. But  the  weight  of  authority  and  reason  sustains  the 
taxation  of  shares  of  stock  in  a  corporation  to  the  holder 
thereof,  notwithstanding  the  corporation  has  paid  taxes  on  its 
property  and  also  on  its  franchises.  The  rents  and  profits  de- 
rived from  real  estate,  and  the  products  of  the  farm,  may 
be  taxed,  though  the  land  from  which  they  are  derived  has 
also  been  taxed.  The  profits  of  a  business  may  be  taxed 
though  the  property  in  the  business,  bought  on  credit,  has  been 
taxed  to  the  owner,  and  the  debt  he  owes  therefor  has  been 
taxed  to  the  creditor,  and  the  property  covered  by  mortgage 
may  be  taxed  to  the  owner,  and  the  mortgage  thereon  to  the 
mortgagee.  These  may  be  instances  of  double  taxation  in  one 
sense,  yet  they  are  not  within  the  rule  of  uniformity  and 
equality  prescribed  by  the  constitution,  which  forbids  the  tax- 
ation twice  of  the  same  property  for  the  same  purpose,  while 
other  property,  under  similar  circumstances  and  conditions,  is 
taxed  only  once.  There  is  no  constitutional  inhibition  against 
such  taxation;  and  in  the  absence  of  constitutional  restric- 
tion, the  power  of  the  legislature  to  tax  is  limited  only  by  its 
own  discretion  and  its  responsibility  to  its  constituents.  It  has 
been  said  the  power  to  tax  is  an  inherent  right  of  sovereignty, 
necessary  to  its  existence,  and  limited  only  by  its  necessities. 
We  make  out  no  conclusive  case  against  a  tax  when  we  show 
that  it  reaches  twice  the  same  property  for  the  same  purpose. 
This  may  have  been  intended,  and,  in  many  cases,  at  least  is 

(53) 


§22  INCOME   TAXATION  (Ch.  3 

admissible."  T1  The  general  weight  of  authority  undoubtedly 
does  sustain  the  principle  that  a  tax  may  be  levied  on  income 
derived  from  property,  in  the  shape  of  rent  or  otherwise, 
although  the  property  yielding  the  income  is  also  subjected  to 
taxation,  and  that  this  does  not  violate  the  rule  against  double 
taxation,  because  the  two  interests  or  species  of  property  are 
distinct  and  severable.72  It  must  be  admitted,  however,  that 
this  doctrine  does  not  pass  entirely  unchallenged.73  And  in 
at  least  one  state  this  very  result  has  been  guarded  against 
by  a  clause  in  the  constitution  which  provides  that  "the  gen- 
eral assembly  may  tax  trades,  professions,  franchises,  and  in- 
comes, provided  that  no  income  shall  be  taxed  when  the 
property  from  which  the  income  is  derived  is  taxed."  7*  On 
the  other  hand  the  constitution  of  another  state  having  an 
income  tax  law  (Wisconsin)  expressly  makes  a  distinction 
between  "property"  and  "income"  and  authorizes  the  taxa- 
tion of  both.  And  the  Supreme  Court  of  that  state,  in  sus- 
taining the  income  tax,  has  remarked:  "It  is  claimed  with 
much  earnestness  and  ability  that  the  act  violates  the  provi- 
sions of  the  fourteenth  amendment  to  the  federal  Constitu- 
tion. One  of  the  contentions  under  this  head  is  that  the 
progressive  features  of  the  act  are  discriminatory,  if  not  abso- 
lutely confiscatory.  Another  contention  is  that  the  act  pro- 
vides for  double  taxation,  and  for  both  reasons  it  is  claimed 

71  Alderman  v.  Wells,  85  S.  C.  507,  67  S.  E.  781,  27  L.  R.  A.  (N.  S.) 

864,  21  Am.  &  Eng.  Ann.  Gas.  193. 

72  Comstock  v.  Grand  Rapids,  54  Mich.  641,  20  N.  W.  623 ;    Wood- 
ruff v.  Oswego  Starch  Factory,  177  N.  Y.  23,  22  N.  E.  994 ;    Chisholm 
v.   Shields,  21  Ohio  Cir.  Ct  R.  231;    Memphis  v.   Ensley,  6  Baxt. 
(Tenn.)  553,  32  Am.  Rep.  532. 

73  "We  are  of  the  opinion  that  it  was  not  the  intention  of  the  leg- 
islature to  tax  real  property  under  the  name  of  land,  slaves,  etc., 
and  then  to  tax  under  the  term  of  incomes  the  profits  realized  from 
such  land,  slaves,  etc.    It  would  be  double  taxation  first  to  tax  prop- 
erty to  the  extent  allowed  by  law,  and  then  to  tax  the  profits  derived 
from  such  property."    City  of  New  Orleans  v.  Fassman,  14  La.  Ann. 

865.  And  see  Kennard  v.  Manchester  (N.  H.)  36  Atl.  553. 
7*  Const  N.  Car.,  art.  5,  §  3. 

(54) 


Ch.  3)  CONSTITUTIONAL   VALIDITY  §  22 

that  it  denies  to  citizens  the  equal  protection  of  the  laws.  It 
is  said  in  support  of  this  contention  that  the  United  States 
Supreme  Court  in  the  Pollock  case  75  has  held  that  taxation 
of  income  derived  from  land  is  in  fact  taxation  of  the  land 
itself,  hence  that  the  act  provides  for  double  taxation,  first 
of  the  land  in  specie,  and  next  of  the  income  therefrom.  It 
seems  that  this  claim  may  be  very  easily  met.  The  question 
in  the  Pollock  case  was  whether  the  taxation  of  rentals  of 
land  was  direct  taxation  within  the  meaning  of  that  term  as 
used  in  the  Constitution  of  the  United  States,  and  it  was  held 
to  be  the  same,  in  substance,  as  a  tax  on  the  land  itself,  and 
hence  a  direct  tax.  This  may  be  admitted  for  the  purposes 
of  the  case,  but  it  does  not  appear  to  in  any  way  decide  the 
question  here  at  issue,  or  even  to  be  very  persuasive.  The 
question  there  was  of  the  power  of  Congress,  under  that  clause 
of  the  federal  Constitution  which  forbids  any  direct  federal 
tax  except  one  levied  in  proportion  to  the  population.  The 
question  here  is  primarily  of  the  power  of  the  legislature 
of  Wisconsin,  under  its  constitution,  to  levy  an  income  tax 
in  addition  to  a  real  estate  tax,  and  secondarily  whether  such 
tax  denies  to  anyone  the  equal  protection  of  the  laws.  The 
inapplicability  of  the  rule  in  the  Pollock  case  to  the  case  here 
presented  seems  so  plain  as  to  require  little  comment.  There 
can  be  no  doubt  of  the  proposition  that  income  taxation  of 
a  progressive  character,  in  addition  to  taxation  of  property, 
is  directly  authorized  by  the  constitution  of  Wisconsin  as 
amended  in  1908.  Words  could  hardly  be  plainer  to  express 
that  idea  than  the  words  used.  From  them  it  clearly  appears 
that  taxation  of  property  and  taxation  of  incomes  are  rec- 
ognized as  two  separate  and  distinct  things  in  the  state  con- 
stitution. Both  may  be  levied,  and  lawfully  levied,  because 
the  constitution  says  so.  However  philosophical  the  argu- 
ment may  be  that  taxation  of  rents  received  from  property 

TO  Pollock  v.  Farmers'  Loan  &  Trust  Co.,  157  U.  S.  429,  15  Sup.  Ct. 
673,  39  L.  Ed.  759. 

(55) 


§22  INCOME   TAXATION  (Ch.  3 

is  in  effect  taxation  of  the  property  itself,  the  people  of  Wis- 
consin have  said  that  'property'  means  one  thing  and  'income' 
means  another;  in  other  words,  that  income  taxation  is  not 
property  taxation,  as  the  words  are  used  in  the  constitution 
of  Wisconsin."  76 

On  the  same  principle,  a  tax  laid  upon  the  receipts  or  in- 
come arising  from  the  conduct  of  a  particular  business,  such 
as  that  of  a  banker  or  broker,  is  not  invalid  because  the  law 
of  the  state  also  requires  persons  engaging  in  such  business 
to  take  out  a  license  and  pay  a  fee  therefor,  nor  is  the  im- 
position of  the  tax  on  the  income  an  unconstitutional  inva- 
sion of  the  right  or  privilege  granted  by  the  license.77  And 
so  a  merchant's  income  from  his  business  is  taxable  under 
the  law,  although  he  is  taxed  also  on  his  stock  in  trade.78 

Questions  of  a  somewhat  different  order  may  arise  when 
it  is  considered  that  the  income  tax  laws  of  two  different 
states,  or  of  a  state  and  the  United  States,  may  bear  upon 
the  same  person  in  respect  to  the  same  income.  But  it  seems 
that  no  constitutional  objection  can  be  based  on  the  fact  that 
two  or  more  independent  sovereignties  subject  the  same  prop- 
erty (subject  to  the  jurisdiction  of  both  or  all)  to  taxation  for 
their  own  separate  purposes.  Thus,  it  is  held  that  a  state 
is  none  the  less  entitled  to  tax  the  transfer  of  an  estate  by 
will  or  inheritance  because  some  part  of  the  property  may 
be  in  another  state  and  be  taxable  there  under  the  same  kind 
of  a  statute,  or  because  the  estate  has  already  paid  an  in- 
heritance tax  to  the  United  States.79  So,  the  tax  imposed  by 
the  federal  income  tax  law  of  1864,  upon  all  dividends  de- 
clared to  stockholders  "as  part  of  the  earnings,  income,  or 

76  State  v.  Frear,  148  Wis.  456,  134  N.  W.  673,  26  Am.  &  Eng.  Ann. 
Cas.  1147. 

77  Drexel  v.  Commonwealth,  46  Pa.  St.  31;    Burch  v.  Savannah,  42 
Ga.  596. 

78  Wilcox  v.  County  Com'rs  of  Middlesex,  103  Mass.  544. 

7»  Appeal  of  Hopkins,  77  Conn.  644,  60  Atl.  657;  Matter  of  Daly, 
100  App.  Div.  373,  91  N.  Y.  Supp.  858. 

(56) 


Ch.  3)  CONSTITUTIONAL   VALIDITY  §  22 

gain  of  any  bank,"  was  held  to  be  assessable  against  the  bank 
for  the  whole  amount  of  dividends  so  declared,  notwithstand- 
ing the  fact  that  it  had  paid  a  sum  to  the  state  of  New  York, 
under  a  statute  of  that  state  imposing  a  tax  against  the  stock- 
holders upon  the  value  of  their  shares,  and  requiring  the  bank 
to  retain  the  amount  thereof  from  the  dividends  due  them, 
until  it  was  made  to  appear  that  their  tax  was  paid.80  And 
that  taxation  of  the  same  property  by  different  governments 
is  neither  unlawful  nor  uncommon  may  further  be  shown  by 
the  following  remarks  of  an  English  judge,  made  in  an  in- 
come tax  case:  "There  could  be  double  taxation  if  the  leg- 
islature distinctly  enacted  it,  but  upon  general  words  of  tax- 
ation, and  when  you  have  to  interpret  a  taxing  act,  you  can- 
not so  interpret  it  as  to  tax  the  subject  twice  over  to  the  same 
tax.  But  it  all  depends  upon  its  being  the  same  tax,  and  as 
the  Attorney  General  has  said,  there  is  nothing  to  prevent 
either  one  legislature,  or  two  legislatures  if  they  have  juris- 
diction over  the  subject-matter,  imposing  different  taxes  upon 
the  same  subject-matter.  Double  taxation  in  one  sense  is 
common  enough  in  the  case  of  these  companies  which  have 
their  head  establishments  in  one  country  and  their  business 
in  another,  although  no  doubt  there  is  always  a  sort  of  griev- 
ance felt  in  reference  to  it."  81  But  although  a  cumulation 
of  taxes  in  this  way  may  be  constitutionally  defensible,  un- 
doubtedly it  sometimes  results  in  very  heavy  burdens.  Under 
the  laws  as  they  stand  at  present,  for  example,  a  person  en- 
gaging in  a  certain  line  of  business  (as,  for  instance,  a  to- 
bacconist) might  be  required  to  pay,  first,  a  license  tax  or  fee 
to  the  United  States,  second,  a  license  tax  or  fee  to  the  mu- 
nicipality where  he  does  business,  third,  a  tax  on  the  building 
in  which  his  business  is  carried  on,  if  he  happens  to  own  it, 
fourth,  a  tax  on  his  stock  in  trade  as  personal  property,  fifth, 

so  Central  Nat.  Bank  v.  United  States,  137  U.  S.  355,  11  Sup.  Ct 
126,  34  L.  Ed.  703. 

si  Stevens  v.  Durban-Roodepoort  Gold  Min.  Co.,  5  Tax  Cas.  402. 

(57) 


§23  INCOME   TAXATION  (Ch.  3 

an  income  tax  to  the  United  States,  sixth,  a  tax  on  the  same 
income  to  the  state. 

§  23.     Taxing  Aggregate   Income  of  Family 

Modern  income  tax  laws  have  commonly  provided  that 
only  one  deduction  of  the  amount  allowed  by  statute  as  ex- 
empt shall  be  made  from  the  aggregate  income  of  all  the 
members  of  any  family.  And  the  practical  construction  has 
been  that  this  required  the  head  of  the  family,  in  making  his 
return  for  taxation,  to  add  the  income  of  his  wife  and  minor 
children,  if  any,  to  his  own.  This  has  been  objected  to  on 
constitutional  grounds  as  making  an  unjust  and  unlawful 
discrimination.  But  the  courts  have  not  taken  that  view. 
Thus,  in  Wisconsin,  it  was  said:  "Objection  is  also  made 
to  the  provision  that  the  income  of  a  wife  living  with  her 
husband  shall  be  added  to  the  income  of  the  husband,  and 
the  income  of  children  under  eighteen  years  of  age  living 
with  their  parent  or  parents  shall  be  added  to  that  of  the 
parent  or  parents.  This  is  another  case  of  classification, 
and  it  is  only  justifiable  in  case  there  is  some  substantial 
difference  of  situation  which  suggests  the  advisability  of  dif- 
ference of  treatment.  We  think  there  clearly  is  such  a  dif- 
ference, in  this :  That  experience  has  demonstrated  that  oth- 
erwise there  will  be  many  opportunities  for  fraud  and  eva- 
sion of  the  law,  which  the  close  relationship  of  husband  and 
wife  or  parent  and  child  make  possible,  if  not  easy.  The 
temptation  to  make  colorable  shifts  and  transfers  of  prop- 
erty in  order  to  secure  double  or  even  triple  exemptions,  if 
there  were  not  some  provision  of  this  kind  in  the  law,  would 
unquestionably  be  very  great.  There  is  no  such  temptation 
or  opportunity  in  the  case  of  the  single  man,  or  the  man  and 
wife  who  are  living  separately."  82 

82  State  v.  Frear,  148  Wis.  456,  134  N.  W.  673,  26  Am.  &  Eug.  Ann. 
Gas.  1147. 

(58) 


Ch.  3)  CONSTITUTIONAL   VALIDITY  §  24 

§  24.     Validity  of  Graduated  or  Progressive  Tax 

The  constitutions  of  both  Wisconsin  and  South  Carolina 
contain  provisions  authorizing  the  graduation  or  progressive 
increase  of  the  income  tax,  and  in  both  those  states  the 
validity  of  this  feature  of  the  law  has  been  sustained.83  In 
Wisconsin,  it  was  also  objected  that  such  an  arrangement 
of  the  tax  was  in  conflict  with  the  provision  of  the  fourteenth 
amendment  to  the  federal  constitution  securing  to  all  citi- 
zens the  equal  protection  of  the  laws ;  but  the  court  ruled 
otherwise.8*  Moreover,  in  some  of  the  states,  the  inherit- 
ance tax  laws  are  also  progressive,  and  in  at  least  one  it 
has  been  decided  that  there  is  no  constitutional  objection  to 
them  on  that  ground,85  thus  furnishing  at  least  an  argument 
from  analogy  to  support  the  similar  feature  of  the  income 
tax  law.  The  only  contrary  decision  was  rendered  in  Ha- 
waii, where  the  court  decided  against  the  constitutional  valid- 
ity of  a  graded  income  tax  (enacted  in  1896,  and  much  re- 
sembling the  federal  income  tax  law  of  1894)  on  the  ground 
of  its  being  in  conflict  with  a  provision  of  the  constitution 
that  each  citizen  "shall  be  obliged  to  contribute  his  propor- 
tion or  share"  of  the  expenses  of  government.  The  law  in 
question  exempted  all  incomes  below  $2,000,  allowed  an 
exemption  of  $2,000  on  all  incomes  below  $4,000,  and  taxed 
all  incomes  above  $4,000  without  exemption.  It  was  held 
that  this  was  not  proportional  taxation,  but  unjust  discrim- 
ination.86 

In  regard  to  the  United  States  law,  where  the  ground  of 
objection,  if  any  there  be,  must  be  found  in  the  federal  con- 

ss  Const.  Wis.,  art.  8,  §  1,  as  amended  in  1908;  Const  S.  Car.,  art. 
10,  §  1 ;  Alderman  v.  Wells,  85  S.  C.  507,  67  S.  E.  781,  27  L.  R.  A. 
(N.  S.)  864,  21  Am.  &  Eng.  Ann.  Gas.  193. 

s*  State  v.  Frear,  148  Wis.  45(3,  134  N.  W.  673,  26  Am.  &  Eng. 
Ann.  Cas.  1147. 

ss  Drew  v.  Tifft,  79  Minn.  175,  81  N.  W.  830,  47  L.  R.  A.  525,  79 
Am.  St.  Rep.  446 ;  State  v.  Bazille,  97  Minn.  11,  106  N.  W.  93. 

se  Campbell  v.  Shaw,  11  Hawaii,  112. 

(59) 


§25  INCOME    TAXATION  (Ch.  3 

stitution  and  not  elsewhere,  it  may  be  remarked  that  the  in- 
come tax  laws  of  1862  and  1864  were  both  graduated,  in  the 
sense  that  they  imposed  a  heavier  tax  upon  incomes  above 
a  certain  figure  than  on  incomes  below  it.  But  apparently 
their  validity  on  this  account  was  never  drawn  in  question. 
The  Supreme  Court  of  the  United  States,  however,  has 
held  that  no  constitutional  objection  to  a  graduated  inherit- 
ance tax  law  can  be  drawn  from  the  provision  of  the  con- 
stitution that  taxes  shall  be  "uniform  throughout  the  United 
States."  For  the  uniformity  in  taxation  required  by  this 
clause  is  not  an  intrinsic  but  a  geographical  uniformity,  and 
the  phrase  is  synonymous  with  the  expression  "to  operate 
generally  throughout  the  United  States."  87  Probably,  there- 
fore, a  similar  decision  may  be  expected  in  regard  to  the 
validity  of  the  super-tax  imposed  by  the  present  income  tax 
law. 

§  25.     Retrospective  Operation  of  Statute 

On  general  principles  and  irrespective  of  explicit  constitu- 
tional limitations,  a  statute  imposing  an  income  tax  may  sub- 
ject to  taxation  the  income  of  the  citizen  for  the  whole  of  the 
current  year  in  which  the  statute  is  passed,  that  is,  not  only 
so  much  of  the  income  as  accrued  from  the  date  of  the  en- 
actment of  the  law  to  the  end  of  the  year,  but  also  that  por- 
tion which  accrued  or  was  earned  from  the  beginning  of  the 
year  to  the  date  of  the  law.  For  the  year's  income  is  treat- 
ed and  considered  as  one  entire  thing,  not  as  made  up  of  sev- 
eral portions  or  items.  And  hence,  although  the  statute 
might  be  called  retrospective  in  its  operation  upon  a  part  of 
the  first  year's  income,  it  is  not  retrospective  in  such  a  sense 
as  to  render  it  unconstitutional.88  "It  is  clearly  perfectly 
constitutional  as  well  as  expedient,  in  levying  a  tax  upon 

ST  Knowlton  v.  Moore,  178  TJ.  S.  41,  20  Sup.  Ct.  747,  44  L.  Ed.  969. 
ss  State  v.  Bell,  61  N.  C.  76;    State  v.  Frear,  148  Wis.  456,  134  N. 
W.  673,  26  Am.  &  Eng.  Ann.  Cas.  1147. 

(60) 


Ch.  3)  CONSTITUTIONAL   VALIDITY  §  25 

profits  or  income,  to  take  as  the  measure  of  taxation  the 
profits  or  income  of  a  preceding  year.  To  tax  is  legal,  and 
to  assume  as  a  standard  the  transactions  immediately  prior 
is  certainly  not  unreasonable,  particularly  when  we  find  it 
always  adopted  in  exactly  similar  cases."  89  "The  right  of 
Congress  to  have  imposed  this  tax  by  a  new  statute,  al- 
though the  measure  of  it  was  governed  by  the  income  of  the 
past  year,  cannot  be  doubted ;  much  less  can  it  be  doubted 
that  it  can  impose  such  a  tax  on  the  income  of  the  current 
year,  though  part  of  that  year  had  elapsed  when  the  statute 
was  passed."  90  So  the  Wisconsin  statute  was  held  not  to 
be  invalid  because  it  included,  as  part  of  the  income  to  be 
taxed  in  the  year  of  its  enactment,  profits  derived  from  the 
sale  of  property  purchased  at  any  time  within  three  years 
previously.91 

But  the  case  is  different  in  regard  to  the  federal  income 
tax.  Until  the  adoption  and  promulgation  of  the  Sixteenth 
Amendment,  Congress  had  no  rightful  power  to  tax  incomes, 
unless  on  condition  that  the  tax  should  be  apportioned 
among  the  several  states.  Hence  if  the  present  statute  had 
attempted  to  tax  the  whole  of  the  citizen's  income  for  the 
year  1913,  it  would  have  included  some  gains  and  profits 
which,  at  the  time  they  were  acquired,  and  when  alone  they 
could  be  described  as  "income,"  were  not  subject  to  the  tax- 
ing power  of  Congress,  except  on  the  condition  mentioned. 
Hence  it  is  provided  that  "for  the  year  ending  December 
thirty-first,  1913,  said  tax  shall  be  computed  on  the  net  in- 
come accruing  from  March  first  to  December  thirty-first, 
1913,  both  dates  inclusive,  after  deducting  five-sixths  only 
of  the  specific  exemptions  and  deductions  herein  provided 
for." 


8»  Drexel  v.  Commonwealth,  46  Pa.  St.  31. 

so  Stockdale  v.  Insurance  Companies,  20  Wall.  323,  22  L.  Ed.  348. 
91  State  v.  Frear,  148  Wis.  456,  134  N.  W.  673,  26  Am.  &  Eng.  Ann. 
Cas.  1147. 

(61) 


§  26  INCOME    TAXATION  (Ch.  3 

§  26.  Objections  as  to  Title,  Purpose,  and  Mode  of  En- 
actment of  Statute 

The  constitution  of  South  Carolina  provides  that  no  tax 
shall  be  levied  except  in  pursuance  of  a  law  which  shall  dis- 
tinctly state  the  object  of  the  same,  to  which  object  the  tax 
shall  be  applied.  When  the  income  tax  law  of  that  state 
was  adopted,  in  1897,  its  validity  was  assailed  on  the  ground 
that  it  did  not  comply  with  this  constitutional  provision.  But 
as  the  title  of  the  statute  was  "An  act  to  raise  revenue  for 
the  support  of  the  state  government  by  the  levy  and  collection 
of  a  tax  on  income,"  the  court  had  no  difficulty  whatever 
in  holding  that  it  did  distinctly  state  the  object  to  which  the 
tax  was  to  be  applied.92  In  the  same  case  it  was  further  held 
that  this  statute  was  not  in  violation  of  another  provision  of 
the  state  constitution  to  the  effect  that  the  General  Assembly 
shall  provide  for  an  annual  tax  sufficient  to  defray  the  esti- 
mated expenses  of  the  state  for  a  year.  It  was  argued  that 
the  income  tax  law  attempted  to  provide  for  taxation  for  more 
than  one  year,  regardless  of  the  estimated  expenses  of  the 
state  for  the  years  in  which  it  should  be  collected.  But  the 
court  held  otherwise,  saying  that  the  tax  is  levied  annually, 
and  is  applied  to  the  expenses  of  the  state  in  the  year  in  which 
it  is  collected,  and  the  courts  are  bound  to  assume  that  the 
legislature,  in  estimating  the  annual  expenses  of  the  state, 
takes  into  consideration  all  the  sources  of  income  to  the  state, 
including  the  income  tax,  and  fixes  the  general  levy  accord- 
ingly. 

In  regard  to  the  federal  corporation  tax  law  of  1909,  it  ap- 
peared that  the  bill,  introduced  in  and  passed  by  the  House  of 
Representatives,  was  a  general  bill  for  the  collection  of 
revenue,  including,  as  one  of  its  features,  a  plan  of  inheritance 
taxation,  and  that  this  part  was  stricken  out  by  the  Senate 
and  the  corporation  tax  substituted.  And  it  was  argued  that 

»2  Alderman  v.  Wells,  85  S.  C.  507,  67  S.  E.  781,  27  L.  R.  A.  (N. 
S.)  864,  21  Am.  &  Eng.  Ann.  Cas.  193. 

(62) 


Ch.  3)  CONSTITUTIONAL  VALIDITY  §  27 

this  rendered  the  act  invalid,  since  the  Constitution  provides 
that  all  bills  for  the  raising  of  revenue  shall  originate  in  the 
House  of  Representatives.  But  the  court  held  otherwise,  in 
view  of  the  further  provision  of  the  Constitution  that  the 
Senate  may  propose  or  concur  with  amendments  to  revenue 
bills,  as  well  as  other  bills.83 

§  27.     Objections  to  Administrative  Provisions  of  Act 

Statutes  providing  for  the  taxation  of  incomes  have  often 
been  subjected  to  severe  criticism  on  the  ground  that  they 
confide  too  much  authority  and  discretion  to  executive  and 
administrative  officers,  in  regard  to  the  settlement  of  matters 
of  detail,  to  the  construction  of  the  machinery  necessary  for 
the  operation  of  the  law,  and  to  the  making  of  rules  and  regu- 
lations for  its  enforcement.  But  it  may  now  be  regarded 
as  a  settled  principle  of  constitutional  law  that,  although 
a  legislative  body  cannot  delegate  its  power  to  make  laws,  yet, 
having  enacted  statutes,  it  may  invest  executive  officers  or 
boards  or  commissions  created  for  the  purpose  with  authority 
to  make  rules  and  regulations  for  the  practical  administra- 
tion of  such  statutes  in  matters  of  detail  and  to  enforce  the 
same,  and  also  to  determine  the  existence  of  the  facts  or 
conditions  on  which  the  application  of  the  law  depends.  And 
"there  is  a  marked  and  increasing  tendency  to  leave  more 
and  more  of  what  may  be  called  the  detail  of  legislation  to 
such  officers  and  commissions,  the  legislature  settling  the 
general  policy  and  outline  of  the  laws  on  a  given  subject, 
and  confiding  to  administrative  agencies  the  work  of  erecting 
the  machinery  necessary  for  their  practical  operation  and 
their  application  in  particular  cases."  84  For  this  reason  it 

»3  Flint  v.  Stone  Tracy  Co.,  220  U.  S.  107,  31  Sup.  Ct  342,  55  L. 
Ed.  389. 

»*  Black,  Const.  Law  (3d  edn.)  pp.  96,  97,  and  cases  there  cited. 
See.  particularly,  Union  Bridge  Co.  v.  United  States,  204  U.  S.  364. 
27  Sup.  Ct.  367,  51  L.  Ed.  523 :  Field  v.  Clark,  143  U.  S.  649,  12  Sup. 
Ct.  495,  36  L.  Ed.  294;  Coopersville  Co-operative  Creamery  Co.  v. 
Lemon,  163  Fed.  145,  89  C.  C.  A.  595;  In  re  Huttman,  70  Fed.  699. 

(63) 


§  27  INCOME   TAXATION  (Ch.  3 

is  thought  that  no  valid  objection  to  the  federal  income  tax 
law  can  be  based  upon  the  authority  which  it  intrusts  to  the 
Commissioner  of  Internal  Revenue,  with  respect  to  prescribing 
forms  and  making  rules  and  regulations  on  various  matters 
of  administration,  more  especially  as  it  does  not  go  nearly 
so  far  in  this  regard  as  some  of  the  earlier  acts  of  Congress 
on  the  same  subject,  which  were  never  successfully  challenged 
on  this  ground.  For  similar  reasons,  the  Wisconsin  statute 
was  upheld  against  the  objection  that  it  unconstitutionally  au- 
thorized the  state  tax  commission  to  appoint  the  income  tax 
assessors.  The  court  held  that  this  was  not  invalid  either  as 
a  delegation  of  legislative  power  to  the  commission  or  as  vio- 
lating the  constitutional  guaranties  of  local  self-government.95 
Objection  is  also  made  to  those  provisions  commonly  found 
in  income  tax  laws  which  require  the  citizen  to  disclose  the 
sources  and  amount  of  his  income  in  sworn  returns,  which, 
under  certain  conditions,  are  open  to  the  inspection  of  the 
public,  or  which  require  him  to  open  his  books  and  papers  to 
the  examination  of  the  revenue  officers  or  submit  to  interro- 
gation concerning  his  business  affairs.  Such  provisions,  it  is 
argued,  amount  to  authorizing  "unreasonable  searches  and 
seizures,"  and  moreover,  in  view  of  the  possible  use  of  in- 
formation thus  obtained,  they  may  compel  the  individual  to 
furnish  evidence  against  himself  in  a  criminal  proceeding. 
But  no  decision  sustaining  such  objections  as  these  has  been 
found.  On  the  contrary  the  courts  hold  that  such  provisions 
cannot  be  brought  within  the  reasonable  intendment  of  the 
constitutional  guaranties  referred  to,  that  similar  provisions 
are  already  very  common  in  the  tax  laws  of  various  states 
and  have  always  been  acquiesced  in,  or  at  least,  not  success- 
fully attacked,  and  that,  as  to  the  matter  of  self-crimination, 
even  if  such  a  result  could  follow  from  the  enforcement  of 
any  provision  of  an  income  tax  law,  it  would  be  no  ground 

»5  State  v.  Frear,  148  Wis.  456,  134  N.  W.  673,  26  Am.  &  Eug.  Ann. 
Cas.  1147. 

(64) 


Ch.  3)  CONSTITUTIONAL   VALIDITY  §  28 

for  adjudging  the  whole  statute  unconstitutional,  but  only  a 
matter  to  be  pleaded  by  the  individual  in  his  own  behalf 
when  a  criminal  proceeding  shall  actually  be  brought  against 
him  and  an  attempt  actually  made  to  use  against  him  evidence 
thus  extorted.96 

§  28.     Apportionment  of  Federal  Income  Tax 

The  United  States  income  tax  law  of  1894  was  adjudged 
unconstitutional  on  the  ground  that  it  was  a  "direct"  tax  with- 
in the  meaning  of  the  Constitution  of  the  United  States  and 
yet  was  not  "apportioned  among  the  several  states"  as  that 
instrument  requires.97  The  corporation  tax  law  of  1909  was 
also  not  apportioned  among  the  states,  but  its  validity  was 
sustained  by  the  Supreme  Court,  on  the  ground  that  it  was  not 
a  direct  tax  upon  the  income  of  corporations,  but  an  excise 
tax  upon  the  conducting  or  carrying  on  of  business  in  a  cor- 
porate capacity,  and  that  there  is  nothing  in  the  Constitution 
requiring  excise  taxes  to  be  apportioned  according  to  popula- 
tion.98 So  far  as  regards  the  present  income  tax  law,  and  any 
future  law  of  the  same  character,  the  necessity  of  apportion- 
ment is  dispensed  with  by  the  Sixteenth  Amendment  to  the 
Constitution,  which  provides  that  "the  Congress  shall  have 
power  to  lay  and  collect  taxes  on  incomes,  from  whatever 
source  derived,  without  apportionment  among  the  several 
states,  and  without  regard  to  any  census  or  enumeration." 

»«  Flint  v.  Stone  Tracy  Co.,  220  U.  S.  107,  31  Sup.  Ct.  342,  55  L. 
Ed.  389;  Peacock  v.  Pratt,  121  Fed.  772;  Co-operative  Building  & 
Loan  Ass'n  v.  State,  156  Ind.  463.  60  N.  E.  146. 

»7  Pollock  v.  Farmers'  Loan  &  Trust  Co.,  157  U.  S.  429,  15  Sup. 
Ct.  673,  39  L.  Ed.  759 ;  s.  c.,  158  U.  S.  601,  15  Sup.  Ct.  912,  39  L.  Ed. 
1108. 

»8  Flint  v.  Stone  Tracy  Co.,  220  U.  S.  107,  31  Sup.  Ct.  342,  55  L. 
Ed.  389. 

BL.INC.TAX. — 5  (65) 


§  29  INCOME   TAXATION  (Ch.  4 

CHAPTER  IV 

CONSTRUCTION  OF  STATUTES  IMPOSING  INCOME  TAXES 

§  29.     Rule  of  Strict  Construction. 

30.  Statutes  in  Pari  Materia. 

31.  Associated  Words  and  Phrases. 

§  29.     Rule  of  Strict  Construction 

It  is  a  rule  sanctioned  by  many  authorities,  and  particularly 
with  reference  to  the  revenue  laws  of  the  United  States,  that  a 
statute  imposing  taxes  is  to  be  construed  strictly  against  the 
government  and  in  favor  of  the  taxpayer,  and  that  no  person 
and  no  property  is  to  be  included  within  its  scope  unless  ex- 
plicitly placed  there  by  the  clear  language  of  the  statute,  and 
no  heavier  burdens  imposed  than  the  plain  meaning  of  its 
terms  will  warrant.1  Thus,  it  has  been  said:  "It  is  an  old 
and  familiar  rule  of  the  English  courts,  applicable  to  all  forms 
of  taxation  and  particularly  special  taxes,  that  the  sovereign  is 
bound  to  express  its  intention  to  tax  in  clear  and  unambiguous 
language,  and  that  a  liberal  construction  be  given  to  words  of 
exception  confining  the  operation  of  duty.  *  *  *  We  have 
ourselves  had  repeated  occasion  to  hold  that  the  customs  rev- 

i  American  Net  &  Twine  Co.  v.  Worthington,  141  U.  S.  468,  12 
Sup.  Ct  55,  35  L.  Ed.  821 ;  Benziger  v.  United  States,  192  U.  S.  38, 
24  Sup.  Ct.  189,  48  L.  Ed.  331 ;  Spreckels  Sugar  Co.  v.  McClain,  192 
U.  S.  397,  24  Sup.  Ct.  376.  48  L.  Ed.  496;  Eidinan  v.  Martinez,  184 
U.  S.  578,  22  Sup.  Ct.  515,  46  L.  Ed.  697 ;  Parkview  Building  &  Loan 
Ass'n  v.  Herold,  203  Fed.  876 ;  Mutual  Benefit  Life  Ins.  Co.  v.  Her- 
old,  198  Fed.  199 ;  Missouri,  K.  &  T.  Ry.  Co.  v.  Meyer,  204  Fed.  140 ; 
United  States  v.  Wigglesworth,  2  Story,  369,  Fed.  Cas.  No.  16,690; 
Rice  v.  United  States,  53  Fed.  910,  4  C.  C.  A.  104;  United  States  v. 
Watts,  1  Bond,  580,  Fed.  Cas.  No.  16,653;  Powers  v.  Barney,  5 
Blatchf.  202,  Fed.  Cas.  No.  11,361 ;  Vicksburg  &  M.  R.  Co.  v.  State, 
62  Miss.  105 ;  Matter  of  Will  of  Vassar,  127  N.  T.  1,  12,  27  N.  E.  394. 
Compare  John  J.  Sesnon  Co.  v.  United  States,  182  Fed.  573,  105  C. 
C.  A.  111. 

(66) 


Ch.  4)  CONSTRUCTION   OF   STATUTES 

enue  laws  should  be  liberally  interpreted  in  favor  of  the  im- 
porter, and  that  the  intent  of  Congress  to  impose  or  increase  a 
tax  upon  imports  should  be  expressed  in  clear  and  unambiguous 
language."  2  "It  is  a  general  rule,  in  the  interpretation  of  all 
statutes  levying  taxes  or  duties  upon  subjects  or  citizens,  not 
to  extend  their  provisions  by  implication  beyond  the  clear  im- 
port of  the  language  used,  or  to  enlarge  their  operation  so  as 
to  embrace  matters  not  specifically  pointed  out,  although  stand- 
ing upon  a  close  analogy.  In  every  case,  therefore,  of  doubt, 
such  statutes  are  construed  most  strongly  against  the  govern- 
ment and  in  favor  of  the  subjects  or  citizens,  because  burdens 
are  not  to  be  imposed,  nor  presumed  to  be  imposed,  beyond 
what  the  statute  expressly  and  clearly  imports."  3  "If  the  con- 
sideration thus  given  to  the  case  still  leaves  the  matter  in  doubt, 
there  should  be  applied  the  well-settled  rule  that  the  citizen  is 
exempt  from  taxation,  unless  the  same  is  imposed  by  clear  and 
unequivocal  language,  and  that,  if  there  is  a  fair  doubt  as  to 
the  construction  of  an  act  imposing  taxation,  the  doubt  should 
be  resolved  in  favor  of  those  upon  whom  the  tax  is  sought  to 
be  laid."  *  And  again,  it  is  a  "conceded  principle  that  taxes 
must  be  imposed  by  law,  and  that  the  law  should  be  construed 
favorably  to  the  taxpayer  and  not  extended  by  implication  be- 
yond its  clear  intent."  5  And  so,  "at  the  outset  it  may  be  re- 
marked that  a  statute  providing  for  the  imposition  of  taxes  is 
to  be  strictly  construed,  and  all  reasonable  doubts  in  respect 
thereto  resolved  against  the  government  and  in  favor  of  the 
citizen.  This  principle  is  so  well  established  that  the  citation 
of  any  considerable  number  of  authorities  in  its  support  is  un- 
necessary." 6 

2  Eidman  v.  Martinez,  184  TL  S.  578,  22  Sup.  Ct.  515,  46  L.  Ed.  G97. 
s  United  States  v.  Wigglesworth,  2  Story,  369,  Fed.  Gas.  No.  16,- 
690. 

4  Parkview  Building  &  Loan  Ass'n  v.  Herold,  203  Fed.  876. 
s  Missouri,  K.  &  T.  Ry.  Co.  v.  Meyer,  204  Fed.  140. 
e  Mutual  Benefit  Life  Ins.  Co.  v.  Herold,  198  Fed.  199. 

(67) 


§•29  INCOME   TAXATION  (Ch.  4: 

Applying  these  principles  to  the  specific  case  of  income  tax- 
ation, the  rule  may  be  deduced  that  only  those  persons  and 
corporations  are  subject  to  the  payment  of  the  income  tax  who 
are  specially  described  in  the  statute  authorizing  it  or  clearly 
within  the  meaning  of  the  general  terms  which  it  employs,  and 
that  if  any  substantial  and  reasonable  doubt  arises  as  to  wheth- 
er any  particular  fund  or  kind  or  class  of  gain  or  acquisition 
constitutes  taxable  "income"  within  the  meaning  of  the  law, 
it  is  to  be  resolved  in  favor  of  the  taxpayer  and  not  in  favor 
of  the  government.  And  so  the  authorities  hold.7  Thus,  in 
regard  to  the  federal  corporation  tax  law  of  1909,  it  was  said 
that  this  statute,  "levying  as  it  does  a  tax  upon  the  citizen, 
must  be  strictly  construed;  it  cannot  be  enlarged  by  con- 
struction to  cover  matters  not  clearly  within  its  import. 
The  question  is  not  what  Congress  might  have  done  or 
should  have  done,  but  what  it  actually  did  do.  When  this 
is  ascertained,  the  duty  of  the  court  is  accomplished." 8 
And  this  view  is  further  strengthened  by  the  consideration 
that  the  same  rule  has  come  to  be  accepted  and  applied 
in  the  case  of  the  laws  taxing  inheritances  and  successions, 
which  furnish  the  nearest  analogy  to  an  income  tax  law. 
Such  a  statute,  it  is  held,  must  be  construed  strictly  against  the 
state  or  the  government  and  in  favor  of  the  taxpayer,  and  a 
doubt  as  to  the  taxability  of  a  particular  fund  should  be  re- 
solved in  favor  of  the  citizen.9 

f  Forman  v.  Board  of  Assessors,  35  La.  Ann.  825 ;  Lining  v. 
Charleston,  1  McCord  (S.  C.)  345;  Robson  v.  Regina,  4  Terr.  Law 
Rep.  (Canada)  80. 

s  Pennsylvania  Steel  Co.  v.  New  York  City  Ry.  Co.,  198  Fed.  774, 
117  C.  C.  A.  556. 

»  Eidman  v.  Martinez,  184  U.  S.  578,  22  Sup.  Ct.  515,  46  L.  Ed.  697 ; 
In  re  Harbeck's  Will,  161  N.  Y.  211,  55  N.  E.  850 ;  In  re  Kiinberly's 
Estate,  27  App.  Div.  470,  50  N.  Y.  Supp.  586 ;  People  v.  Koenig,  37 
Colo.  283,  85  Pac.  1129 ;  State  v.  Bazille,  97  Minn.  11,  106  N.  W.  93. 

(68) 


Ch.  4)  CONSTRUCTION   OF  STATUTES  §  30 

§  30.     Statutes  in  Pari  Materia 

It  is  a  fundamental  rule  in  the  interpretation  of  statutes  that 
acts  in  pari  materia  are  to  be  read  and  construed  together. 
The  reasons  for  this  rule  have  been  explained  by  the  present 
writer  in  another  volume,  as  follows:  "All  the  enactments  of 
the  same  legislature  on  the  same  general  subject-matter  are 
to  be  regarded  as  parts  of  one  uniform  system.  Later  stat- 
utes are  considered  as  supplementary  or  complementary  to  the 
earlier  enactments.  In  the  course  of  the  entire  legislative 
dealing  with  the  subject  we  are  to  discover  the  progressive 
development  of  a  uniform  and  consistent  design,  or  else  the 
continued  modification  and  adaptation  of  the  original  design 
to  apply  it  to  changing  conditions  or  circumstances.  In  the 
passage  of  each  act,  the  legislative  body  must  be  supposed  to 
have  had  in  mind  and  in  contemplation  the  existing  legisla- 
tion on  the  same  subject  and  to  have  shaped  its  new  enact- 
ment with  reference  thereto.  Hence  the  same  principle  which 
requires  us  to  study  the  context  for  the  meaning  of  a  par- 
ticular phrase  or  provision,  and  which  directs  us  to  compare 
all  the  several  parts  of  the  same  statute,  only  takes  on  a  broad- 
er scope  when  it  bids  us  read  together,  and  with  reference  to 
each  other,  all  statutes  in  pari  materia.  Whatever  is  ambig- 
uous or  obscure  in  a  given  statute  will  be  best  explained  by  a 
consideration  of  analogous  provisions  in  other  acts  relating 
to  the  same  subject,  or  by  a  study  of  the  general  policy  which 
pervades  the  whole  system  of  legislation.  Secondly,  the  rule 
derives  support  from  the  principle  which  requires  that  the  in- 
terpretation of  a  statute  shall  be  such,  if  possible,  as  to  avoid 
any  repugnancy  or  inconsistency  between  enactments  of  the 
same  legislature.  To  achieve  this  result  it  is  necessary  to  con- 
sider all  previous  acts  relating  to  the  same  matters,  and  to 
construe  the  act  in  hand  so  as  to  avoid,  as  far  as  it  may  be  pos- 
sible, any  conflict  between  them.  Hence,  for  example,  where 
the  legislature  has  used  a  word  in  a  statute  in  one  sense  and 
with  one  meaning,  and  subsequently  uses  the  same  word  in 

(69) 


§30  INCOME   TAXATION  (Ch.  4 

legislating  on  the  same  subject-matter,  it  will  be  understood 
as  using  the  word  in  the  same  sense,  unless  there  is  something 
in  the  context  or  in  the  nature  of  things  to  indicate  that  it  in- 
tended a  different  meaning  thereby."  10  And  it  is  said  that 
the  rule  of  construction  by  the  aid  of  statutes  in  pari  materia 
is  especially  applicable  in  the  case  of  revenue  laws,  which, 
though  made  up  of  independent  enactments,  are  regarded  as 
one  system,  in  which  the  construction  of  any  separate  act  may 
be  aided  by  the  examination  of  other  provisions  which  com- 
pose the  system.11  And  it  is  not  necessary  to  the  application 
of  this  rule  that  the  earlier  act  should  still  continue  in  force. 
Although  it  may  have  expired  by  its  own  limitation,  or  though 
it  may  have  been  expressly  or  impliedly  repealed,  still  it  is  to 
be  considered  and  read  as  explanatory  of  the  later  enact- 
ment.12 It  has  been  held,  however,  in  one  case,  that  where  a 
personal  tax  law  imposes  a  tax  on  a  certain  occupation,  with- 
out defining  it,  it  is  doubtful  whether  the  court,  in  construing 
it,  can  look  to  old  and  repealed  tax  laws,  which  define  such 
occupation,  to  ascertain  the  legislative  meaning.13 

Now  it  has  been  held  that  all  the  successive  acts  of  Congress 
from  1861  to  1867,  imposing  income  taxes,  are  in  pari  materia, 
and  are  to  be  construed  as  one  continuous  enactment.14  And 
of  course  this  doctrine  may  be  expanded  so  as  to  include  the 
acts  of  Congress  of  1894,  1909,  and  1913.  (It  is  chiefly  for 
this  reason  that  all  these  various  enactments  have  been  printed 
in  full  in  the  appendix  to  this  volume,  where  they  may  be 
studied  and  compared  at  length.)  And  it  follows  that  it  will 
be  a  legitimate  method  of  construing  the  present  income  tax 
law,  in  cases  where  its  language  in  relation  to  a  particular 
point  or  subject  is  obscure,  confusing,  or  unintelligible,  to 

10  Black,  Interpretation  of  Laws  (2d  edn.)  pp.  332-334. 

11  United  States  v.  Collier,  3  Blatchf.  325,  Fed.  Gas.  No.  14,833. 

1 2  King  v.  Loxdale,  1  Burr.  445 ;    Southern  Ry.  Co.  v.  McNeill,  155 
Fed.  756. 

is  Lockwood  v.  District  of  Columbia,  24  App.  D.  C.  569. 
i*  United  States  v.  Smith,  1  Sawy.  277,  Fed.  Cas.  No.  16,341. 

(70) 


Ch.  4)  CONSTBDCTION   OF  STATUTES  §31 

compare  it  with  the  corresponding  provisions  on  the  same  point 
in  the  earlier  acts,  which  may  be  more  clear  and  precise,  and 
to  presume  that  Congress  intended  its  words  to  be  understood 
in  the  same  sense  as  before,  unless  there  is  such  a  distinct 
change  of  language  as  to  compel  the  inference  that  a  change 
in  legislation  was  certainly  intended.  So  likewise,  the  income 
tax  law  of  any  given  state  is  to  be  read  and  compared,  not  only 
with  previous  income  tax  laws,  if  any,  but  also  with  all  the 
other  revenue  laws  of  the  same  state,  each  serving  to  illumi- 
nate and  explain  the  others,  in  cases  where  their  provisions 
touch  or  coincide,  and  where  any  substantial  doubt  arises  from 
the  ambiguity  of  the  language  employed. 

§  31.     Associated  Words  and  Phrases 

It  is  another  ancient  and  fundamental  rule  in  the  construc- 
tion of  statutes  that  the  meaning  of  a  doubtful  word  or  phrase 
may  be  ascertained  by  reference  to  the  meaning  of  other  words 
or  phrases  with  which  it  is  associated,  and  that,  where  several 
things  are  referred  to,  they  are  presumed  to  be  of  the  same 
class,  when  connected  by  a  copulative  conjunction,  unless  a 
contrary  intent  plainly  appears.15  For  example,  all  the  acts 
of  Congress  on  the  subject  of  income  taxation,  from  1862  to 
the  present  time,  have  associated  together  the  words  "gains," 
"profits,"  and  "income"  as  descriptive  of  the  subject  taxed, 
and  the  same  is  true  of  the  income  tax  laws  of  some  of  the 
states.  These  words  may  be  traced  far  back  in  the  history 
of  English  taxation.  The  original  income  tax  law  of  that 
country,  enacted  in  1799,  imposed  a  tax  on  "income"  by  that 
name,  but  the  acts  of  1842  and  1853  introduced  the  associated 
terms  "profits  and  gains,"  whence  they  were  apparently  bor- 
rowed by  Congress  in  framing  the  act  of  1862,  and  have  since 
persisted  in  use.  Applying  the  rule  above  stated,  we  are  jus- 
tified in  asserting  the  following  principles  as  applicable  to  the 
interpretation  of  the  phrase  in  question:  If  it  is  doubtful 

IB  Black,  Interpretation  of  Laws  (2d  edn.)  p.  194. 

(71) 


§  31  INCOME    TAXATION  (Ch.  4: 

whether  or  not  a  particular  fund  or  acquisition  is  taxable  as 
"income,"  under  the  statute,  it  is  not  taxable  unless  it  is  in- 
come in  the  nature  of  "gain"  or  "profit."  If  any  item  is  clear- 
ly included  in  the  description  of  "gains"  yet  it  is  not  taxable 
unless  it  is  a  gain  in  the  nature  of  "income"  or  "profit."  And 
although  the  disputed  item  may  be  certainly  a  "profit,"  in  one 
sense  of  the  word,  yet  it  is  not  taxable  unless  it  be  a  profit  ac- 
cruing by  way  of  "gain"  or  "income." 

(72) 


Ch.  5)  WHAT    CONSTITUTES   TAXABLE    INCOME  §  32 

CHAPTER  V 

WHAT   CONSTITUTES   TAXABLE  INCOME 

§  32.  General  Definitions  of  "Income." 

33.  "Profits"  and  "Gains"  Compared  and  Distinguished. 

34.  Change  or  Substitution  of  Capital  Distinguished. 

35.  Rent  of  Land  and  Royalties. 

36.  Rental  Value  of  Residence. 

37.  Salaries  and  Earnings  from  Professions  and  Trades. 

38.  Pensions,  Gifts,  Prizes,  and  Awards. 

39.  Legacies  and  Inheritances. 

40.  Products  of  Agriculture  or  Stock-Raising. 

41.  Produce  of  Mines  and  Oil  and  Gas  Wells. 

42.  Profits  of  Mercantile  Business. 

43.  Profits  from  Unauthorized  Business. 

44.  Income  from  Partnership  Business. 

45.  Profits  on  Sale  of  Real  Estate. 

46.  Profits  of  Sales  of  Securities. 

47.  Increase  in  Value  not  Realized  by  Sale. 

48.  Uncollected  Interest  and  Accounts. 

49.  Profit  to  Accrue  on  Uncompleted  Contracts. 

50.  Profits  from  Sale  or  Lease  of  Patent  Rights. 

51.  Annuities. 

52.  Interest  on  Government  Bonds. 

53.  Dividends  on  Corporate  Stock. 

54.  Same;    Stock  Dividends. 

55.  Accumulated  Earnings  or  Undivided  Profits  of  Corporation. 

56.  Right  to  Subscribe  for  New  Stock  of  Corporation. 

57.  Sale  and  Distribution  of  Assets  of  Corporation. 

§  32.     General  Definitions  of  "Income" 

"Income"  is  defined  as  that  gain  which  proceeds  from  labor, 
business,  property,  or  capital  of  any  kind,  as,  the  produce  of  a 
farm,  the  rent  of  houses,  the  proceeds  of  professional  busi- 
ness, the  profits  of  commerce  or  of  occupation,  or  the  interest 
of  money  or  stock  in  funds,  etc. ;  revenue ;  salary ;  especially 
the  annual  receipts  of  a  private  person  or  a  corporation  from 

(73) 


§  32  INCOME   TAXATION  (Ch.  5 

property.1  It  means  that  which  comes  into  or  is  received  from 
any  business  or  investment  of  capital,  without  reference  to  the 
outgoing  expenditures ; "  when  applied  to  the  affairs  of  indi- 
viduals, the  term  expresses  the  same  idea  that  "revenue"  does 
when  applied  to  the  affairs  of  a  nation  or  state.2  The  term 
"income,"  as  used  in  a  statute  providing  that  no  income  de- 
rived from  property  subject  to  taxation  shall  be  taxed,  "means 
the  income  for  the  year  and  is  the  result  of  the  year's  business. 
It  is  the  net  result  of  many  conbined  influences — the  use  of  the 
capital  invested;  the  personal  labor  and  services  of  the  mem- 
bers of  the  firm,  and  the  skill  and  ability  with  which  they  lay 
in,  and  from  time  to  time  renew,  their  stock ;  the  carefulness 
and  good  j  udgment  with  which  they  sell  and  give  credit ;  and 
the  foresight  and  address  with  which  they  hold  themselves  pre- 
pared for  the  fluctuations  and  contingencies  affecting  the  gen- 
eral commerce  and  business  of  the  government.  To  express 
it  in  a  more  summary  and  comprehensive  form,  it  is  the  crea- 
tion of  capital,  industry,  and  skill."  3  Again,  as  this  term  is 
used  in  statutes  relating  to  the  nature  and  ownership  of  prop- 
erty, it  includes  the  rents  and  profits  of  real  estate,  interest  on 
money,  dividends  on  stock,  and  other  produce  of  personal 
property.4  Particularly,  when  applied  to  a  sum  of  money,  or 
to  money  invested  in  public  or  corporate  securities,  income 
means  interest.5 

But  an  important  distinction  must  be  noted  in  the  significa- 
tion of  this  word,  according  as  it  is  used  in  the  ordinary  busi- 

1  Mundy  v.  Van  Hoose,  104  Ga.  625,  30  S.  E.  782 ;   Sowards  v.  Tay- 
lor, 42  111.  App.  275;    Remington  v.  Field,  16  R.  I.  509,  17  Atl.  551; 
Thorn  v.  De  Breteull,  86  App.  Div.  405,  83  N.  Y.  Supp.  849. 

2  Bates  v.  Porter,  74  Cal.  224,  15  Pac.  732;    People  v.  Board  of 
Sup'rs  of  Niagara  County,  4  Hill  (N.  Y.)  20;    Mundy  v.  Van  Hoose, 
104  Ga.  625,  30  S.  E.  782. 

3  Wilcox  v.  Middlesex  County,  Com'rs,  103  Mass.  544. 

*  Rev.  Codes  N.  Dak.  1899,  §  3322;    Civ.  Code  S.  Dak.  1903,  §  238; 
Civ.  Code  Cal.  1903,  §  748. 

5  Sims'  Appeal,  44  Pa.  St.  345 ;    Pearson  v.  Chace,  10  R.  I.  455. 

(74) 


Ch.  5)  WHAT    CONSTITUTES   TAXABLE    INCOME  §  32 

ness  affairs  of  the  community  (or  in  statutes  relating  thereto) 
or  in  a  tax  statute.  In  the  former  case,  it  is  understood  to 
mean  "net"  income  or  profit ;  in  the  latter  case,  it  is  equivalent 
to  "gross"  income  or  "gross  receipts,"  unless  otherwise  speci- 
fied in  the  statute.  Thus,  it  is  said  that  the  word  "income,"  as 
used  in  commerce  and  trade,  means  the  balance  of  gain  over 
loss  in  the  fiscal  year  or  other  period  of  computation,  or  it  is 
the  ultimate  profit  of  a  business  or  trade,  ascertained  by  plac- 
ing the  sum  total  of  gains  over  against  the  sum  total  of  losses.6 
So,  ''the  income  of  an  estate  means  nothing  more  than  the 
profit  it  will  yield  after  deducting  the  charges  of  management, 
or  the  rent  which  may  be  obtained  for  the  use  of  it.  The  rents 
and  profits  of  an  estate,  the  income,  or  the  net  income  of  it, 
are  all  equivalent  expressions."  7  So,  in  a  statute  providing 
that  a  certain  railroad  company  shall  be  required  to  make  an 
annual  payment  from  its  income  to  the  sinking  fund,  to  aid  in 
the  construction  of  the  road,  the  word  "income"  must  be  con- 
strued as  meaning  the  amount  of  money  remaining  to  the  cor- 
poration on  making  up  its  annual  account,  after  deducting 
from  all  its  receipts  the  necessary  expense  of  repairs  and  man- 
agement, and  also  the  amount  of  interest  on  the  debt  of  the 
commonwealth  which  the  corporation  is  bound  to  pay  in  behalf 
of  the  commonwealth.8  So  in  a  railroad  mortgage  providing 
that,  until  default,  the  mortgagor  shall  remain  in  possession 
and  operate  the  road  and  take  the  tolls,  rents,  and  income,  and 
apply  them  to  the  payment  of  current  expenses,  the  term  "in- 
come" means  what  is  left  after  paying  the  expenses  of  earning 
income.9 

But  on  the  other  hand,  in  a  statute  imposing  taxes,  "in- 
come" means  gross  receipts,  not  net  profits,  unless  it  is  so  spec- 
ified. Whenever  the  law  means  to  tax  the  clear  profits  arising 

6  City  of  Kingston  v.  Canada  Life  Assur.  Co.,  19  Ontario,  453. 

t  Andrews  v.  Boyd,  5  Me.  199. 

s  Opinion  of  Justices,  5  Mete.  (Mass.)  596. 

»  Poland  v.  Lainoille  Valley  R.  Co.,  52  Vt  144,  177. 

(75) 


§  32  INCOME   TAXATION  (Ch.  5 

from  the  employment  of  capital  or  otherwise,  the  expression 
used  is  "net  income"  or  "net  annual  income."  10  And  espe- 
cially the  phrase  "whole  income"  means  the  aggregate  of  all 
receipts  without  any  deduction  for  expenses  or  losses,  that  is, 
it  means  gross  receipts  and  not  net  profits.11  But,  as  stated  in 
an  earlier  section,12  if  this  word  is  associated  with  the  term 
"profits,"  as  in  the  phrase  "gains,  profits,  and  income,"  it  may 
take  color  from  the  more  restricted  term  and  be  limited  by  it. 
That  is  to  say,  in  the  phrase  quoted,  the  word  "income"  should 
not  be  taken  in  its  most  extensive  signification,  but  as  meaning 
income  which  is  in  the  nature  of  a  profit,  in  other  words,  net  in- 
come. But  it  must  be  admitted  that  there  is  some  authority  to 
the  contrary.13 

Unless  limited  by  the  context,  however,  the  word  "income" 
is  one  of  very  broad  and  comprehensive  meaning.  Thus,  in  a 
constitutional  provision  that  no  municipal  corporation  shall  be- 
come indebted  in  any  one  year  for  a  greater  amount  than  its 
income,  unless  with  the  consent  of  two-thirds  of  the  voters, 
the  word  income  means  income  derived  from  any  and  all 
sources,  and  not  that  derived  from  taxation  alone.14  But  it 
cannot  be  too  strongly  insisted  upon  that  the  word  "income," 
when  properly  used,  is  applicable  only  to  receipts  in  cash. 
When  a  bond  which  was  purchased  at  a  discount  reaches  par 
in  the  market,  the  owner  cannot  properly  be  said  to  have  made 

10  People  v.  Supervisors  of  New  York,  18  Wend.  (N.  Y.)  605;  Wells 
v.  Shook,  Fed.  Gas.  No.  17,406. 

11  Lawless  v.  Sullivan,  3  Can.  Sup.  Ct.  117. 

12  Supra,  §  31. 

is  Morton's  Ex'rs  v.  Morton's  Ex'r,  112  Ky.  706,  66  S.  W.  641.  where 
it  was  held  that,  in  a  statute  relating  to  dower  in  the  "rents  and 
profits"  of  a  decedent's  real  estate,  the  phrase  means  gross  rents, 
without  deduction  for  taxes,  insurance,  or  repairs,  and  that  the  use 
of  the  word  "profits"  cannot  be  deemed  to  be  a  limitation  upon  or 
qualification  of  the  preceding  word  "rents"  so  as  to  restrict  that 
word  in  meaning  to  "net  rents." 

i*  Lamar  Water  &  Electric  Light  Co.  v.  City  of  Lamar,  128  Mo.. 
188,  26  S.  W.  1025,  32  L.  R.  A.  157. 

(76) 


Ch.  5)  WHAT    CONSTITUTES    TAXABLE    INCOME  §  32 

a  profit ;  he  is  in  a  position  where  he  can  realize  a  profit  if  he 
sells  the  bond,  but  not  otherwise.  If  he  sells,  then  the  sum 
gained  may  constitute  a  part  of  his  income,  but  it  cannot  be 
so  described  while  he  continues  to  hold  the  security.  So,  the 
farmer's  crop  is  not  his  income;  it  is  the  source  from  which 
his  income  will  be  derived  when  it  is  converted  into  cash.  So, 
a  sum  which  is  due  as  interest  on  a  note,  but  which  remains 
uncollected  at  the  end  of  the  year,  may  be  reckoned  as  a  part 
of  the  year's  income,  as  a  matter  of  bookkeeping,  but  it  is  not 
properly  described  as  income  until  it  is  received,  that  is,  it  is 
"income"  when  it  comes  in,  but  not  while  it  remains  outstand- 
ing. This  rule  may  perhaps  be  relaxed  so  far  as  to  admit  an 
exception  in  the  case  of  certain  items  which  are  received  as  the 
equivalent  of  money  and  which  are  readily  convertible  into 
cash.  But  the  principle  is,  as  ruled  in  an  English  case,  that 
nothing  is  to  be  considered  as  income  except  what  represents 
value  in  money,  that  is,  either  money  or  something  that  is 
equivalent  to  money  because  it  can  be  converted  into  money 
and  the  proceeds  expended  in  any  way  the  recipient  may 
please.  In  this  case,  speaking  of  the  income  tax  of  that  coun- 
try, it  was  said :  "It  is  a  tax  on  income  in  the  proper  sense  of 
the  word.  It  is  a  tax  on  what  comes  in,  on  actual  receipts,  not 
on  what  saves  his  pocket,  but  on  what  goes  into  his  pocket."  15 
Of  course  it  is  entirely  within  the  power  of  a  legislature  hav- 
ing jurisdiction  to  lay  an  income  tax  to  make  the  word  "in- 
come" include  items  which  are  not  at  all  proper  to  be  described 
under  that  name.  But  then  those  items  are  taxed,  not  be- 
cause they  constitute  income,  but  because  the  legislature  has 
said  that  they  shall  be  taxed.  And  on  the  other  hand,  when 
the  word  "income"  is  clearly  defined  in  the  act  imposing  the 
tax,  it  cannot  be  taken  to  include  anything  which  is  not  within 
that  definition.16 

is  Tenant  v.  Smith  [1892]  App.  Cas.  150,  61  Law  Jour.  P.  C.  11. 
is  City  of  New  Orleans  v.  Hart,  14  La.  Ann.  803;   City  of  New  Or- 
leans v.  Fassman,  14  La.  Ann.  865. 

(77) 


§  32  INCOME   TAXATION  (Ch.  5 

We  conclude  therefore  that,  for  the  purpose  of  an  income 
tax,  a  proper  definition  of  the  word  "income"  would  be  all 
that  a  man  receives  in  cash  during  the  year,  except  such  sums 
as  are  merely  capital  or  principal  in  a  changed  form,  that  is, 
excluding  sums  which  are  merely  the  proceeds  of  some  other 
form  of  capital  converted  into  cash. 

§  33.  "Profits"  and  "Gains"  Compared  and  Distinguished 
"Profit"  is  the  gain  made  on  any  business  or  investment 
when  both  the  receipts  and  expenditures  are  taken  into  consid- 
eration.17 It  is  the  amount  of  acquisition  beyond  expenditure, 
the  excess  of  value  received  for  producing  or  selling  over  and 
above  cost.18  It  represents  the  net  gain  made  from  an  invest- 
ment, or  from  the  prosecution  of  any  business,  after  the  pay- 
ment of  all  expenses  incurred.19  In  the  common  acceptation 
of  the  term,  "profit"  is  the  benefit  or  advantage  remaining 
after  all  costs,  charges,  and  expenses  have  been  deducted,  be- 
cause until  then,  and  while  anything  remains  uncertain,  it  is 
impossible  to  say  whether  or  not  there  has  been  a  profit.20  Or, 
according  to  a  fuller  description  given  by  the  Supreme  Court 
of  California,  the  word  "profits"  signifies  an  excess  of  the 
value  of  returns  over  the  value  of  advances;  the  excess  of 
receipts  over  expenditures;  that  is,  net  earnings.  In  com- 
merce it  means  the  advance  in  the  price  of  goods  sold  beyond 
the  cost  of  purchase.  In  distinction  from  the  wages  of  labor, 
it  is  well  understood  to  imply  the  net  return  to  the  capital  or 
stock  employed  after  deducting  all  the  expenses,  including  not 

IT  Providence  Rubber  Co.  v.  Goodyear,  9  Wall.  788,  19  L.  Ed.  566; 
People  v.  San  Francisco  Sav.  Union,  72  Cal.  199,  13  Pac.  498 ;  Taylor 
v.  Harwell,  65  Ala.  1;  Mayer  v.  Nethersole,  71  App.  Div.  383,  75  N. 
Y.  Supp.  987. 

is  Mundy  v.  Van  Hoose,  104  Ga.  292,  30  S.  E.  783;  Curry  v.  Charles 
Warner  Co.,  2  Marv.  (Del.)  98,  42  Atl.  425;  Bates  v.  Porter.  74  Cal. 
224,  15  Pac.  732;  People  v.  Niagara  County  Sup'rs,  4  Hill  (X.  Y.)  20. 

19  Goodhart  v.  Pennsylvania  R.  Co.,  177  Pa.  St.  1,  35  Atl.  191,  55 
Am.  St.  Rep.  705. 

20  Mackey  v.  Millar,  6  Phila.  (Pa.)  527. 

(78) 


Ch.  5)  WHAT    CONSTITUTES   TAXABLE    INCOME  §  33 

only  the  wages  of  those  employed  by  the  capitalist,  but  the 
wages  of  the  capitalist  himself  for  superintending  the  employ- 
ment of  his  capital  stock.  Profits  are  divided  by  writers  on 
political  economy  into  gross  and  net;  the  former  being  the 
entire  difference  between  the  value  of  advances  and  the  value 
of  returns,  and  the  latter  so  much  of  this  difference  as  arises 
exclusively  from  the  capital  employed.  Profits  cannot  consist 
of  earnings  never  yet  received.21  So,  the  term  "profits"  as 
used  in  a  statute  imposing  a  tax  of  five  per  cent  on  all  profits 
of  railroad  and  canal  companies,  refers  to  the  profits  arising 
from  the  operation  of  the  railroad  or  canal,  but  without  deduc- 
tion of  interest  paid  to  its  bondholders  or  dividends  paid  to 
its  stockholders,  that  is,  the  excess  of  receipts  over  expenses 
of  operation.22  But  the  surplus  earnings  of  a  corporation  over 
and  above  all  expenses  are  taxable  as  "profits,"  notwithstand- 
ing that  it  is  required  by  law  to  appropriate  all  such  surplus  to 
a  particular  purpose  (as,  to  a  sinking  fund)  and  to  no  other.23 
It  is  said,  and  with  truth,  that  this  term  is  often  used  as 
synonymous  with  "income"  and  as  meaning  the  same  thing, 
and  particularly  where  the  two  words  are  coupled  in  the  same 
phrase.24  And  one  court  has  remarked  that,  when  they  are 
thus  joined  together,  there  is  no  difference  in  the  meaning  of 
the  words,  and  the  use  of  them  both  is  only  duetto  a  lawyer- 
like  fondness  for  using  several  words  where  one  would  be  suf- 
ficient.25 But  this  is  scarcely  correct.  There  is  a  substantial 
difference  in  the  meaning  of  the  two  words.  And  it  is  more 
accurate  to  say  that,  when  they  are  joined  together  in  the 
same  phrase,  the  word  "profits"  is  used  to  particularize  and 

21  People  v.  San  Francisco  Sav.  Union,  72  Cal.  199,  13  Pac.  498. 

22  Sioux  City  &  P.  R.  Co.  v.  United  States,  110  U.  S.  205,  3  Sup. 
Ct.  565,  28  L.  Ed.  120. 

23  Mersey  Docks  &  Harbour  Board  v.  Lucas,  51  Law  J.  Q.  B.  114,. 
1  Tax  Cas.  385,  affirmed,  L.  R.  8  App.  Cas.  891. 

2*  Bates  v.  Porter,  74  Cal.  224,  15  Pac.  732;    Burt  v.  Rattle,  31 
Ohio  St.  116,  130. 

25  in  re  Clark,  62  Hun  (N.  Y.)  275,  17  N.  Y.  Supp.  93. 

(79) 


§  33  INCOME    TAXATION  (Ch.  5 

point  out  one  kind  of  income,  or  income  derived  from  a  par- 
ticular source;  and  it  will  generally  be  found  that  their  joinder 
is  easily  explained  from  their  correlation  with  other  descriptive 
words  in  the  same  sentence,  as,  for  example,  where  "gains" 
may  be  correlated  with  ''sales  or  dealings  in  property,"  "in- 
come" with  such  words  as  "salaries"  and  earnings  from  "pro- 
fessions and  vocations,"  and  "profits"  with  "business,  trade, 
and  commerce."  Besides,  "income"  is  clearly  a  word  of  larger 
import  than  "profits."  The  former  term  may  very  properly 
include  such  items  as  the  rent  of  houses,  interest  on  invest- 
ments, the  earnings  of  a  professional  man,  or  the  salary  of  an 
officer  of  a  corporation,  but  none  of  these  could  with  any  pro- 
priety be  called  "profits."  In  effect,  the  latter  term  is  more 
appropriately  confined  to  gains  resulting  from  the  "operations 
of  trade  or  commerce,  and  especially  from  mercantile  or  man- 
ufacturing business  or  transportation.  Moreover,  it  is  im- 
portant not  to  lose  sight  of  the  distinction  that,  while  "income" 
means  that  which  comes  in  or  is  received  from  any  business  or 
investment  of  capital,  without  reference  to  the  outgoing  ex- 
penditures, "profit"  means  the  gain  which  is  made  upon  any 
business  or  investment  when  both  receipts  and  payments  are 
taken  into  account.26 

It  is  not  quite  so  easy  to  account  for  the  use  of  the  word 
"gain"  in  conjunction  with  the  two  other  terms  which  we  have 
been  considering.  But  it  may  probably  be  said  that  when  a 
tax  law  employs  the  phrase  "gains,  profits,  and  income,"  to 
describe  what  is  taxable,  the  term  "gains"  is  inserted  out  of 
abundant  caution,  and  intended  to  include  an  acquisition  of 
the  taxpayer  which  is  not  to  be  described  as  a  "profit,"  and 
which  might  not  be  included  in  the  term  "income"  if  that  word 
were  taken  in  a  narrow  sense.  Properly  speaking,  "gain" 
means  that  which  is  acquired  or  comes  as  a  benefit,27  and  in  a 

26  In  re  Murphy,  80  App.  Div.  238,  80  N.  T.  Supp.  530. 

27  Thorn  v.  De  Breteuil,  86  App.  Div.  405,  83  N.  Y.  Supp.  849. 

(SO) 


Ch.  5)  WHAT    CONSTITUTES    TAXABLE    INCOME  §  34 

statute  laying  an  income  tax  it  may  mean  money  received 
within  the  year  which  is  not  the  fruit  of  a  business  transaction 
nor  of  the  labor  or  exertion  of  the  individual,  but  something 
arising  from  fortuitous  circumstances  or  conditions  which  he 
does  not  control.  In  this  signification,  the  term  would  include 
money  received  as  a  legacy  or  money  won  on  a  wager. 

§  34.     Change  or  Substitution  of  Capital  Distinguished 

Both  in  popular  and  legal  parlance,  "income"  is  distin- 
guished from  "capital"  or  "principal."  Capital  is  the  source 
of  income.  Income  is  the  fruit  of  capital.  Capital  may  be 
made  very  mobile  and  constantly  changed  from  one  form 
of  investment  to  another.  Each  time  that  it  returns  to  the 
owner  it  may  or  may  not  bring  income  with  it.  But  it  would 
be  a  misnomer  to  reckon  the  whole  of  each  such  return  as 
"income"  simply  because  it  is  so  much  money  coming  into 
the  possession  of  the  owner.  Out  of  the  fund  so  returning 
there  must  first  be  deducted,  in  case  there  has  been  no  loss,  a 
sum  sufficient  to  replace  the  capital  originally  invested,  and 
the  balance,  if  any,  will  be  income.  Thus,  when  money  is 
loaned  on  a  promissory  note  for  one  year  at  interest,  and 
the  note  is  paid  at  maturity  with  the  accumulated  interest, 
the  sum  received  must  be  apportioned  between  capital  and 
interest.  The  receipt  of  so  much  of  that  sum  as  equals  the 
face  of  the  note  is  not  a  receipt  of  income ;  it  is  a  replacement 
or  substitution  of  capital;  only  the  money  received  as  in- 
terest constitutes  income.  So  the  income  of  a  merchant 
does  not  include  his  gross  receipts,  but  only  so  much  thereof 
as  represents  the  profits  on  his  sales ;  the  remainder  is  capital 
replaced.  Again,  a  sum  of  money  received  from  a  railroad 
company  in  payment  of  damages  for  a  part  of  a  person's 
land  taken  by  the  railroad  for  its  use,  is  not  income;  it  is  a 
substituted  capital.28  And  the  mere  change  or  transfer  of 

28  Gibson  v.  Cooke,  1  Mete.  (Mass.)  75. 

BL.INC.TAX.— 6  (81) 


§  35  INCOME   TAXATION  (Ch.  5 

a  fund  held  in  trust,  from  the  hands  of  one  trustee  into  the 
hands  of  another  or  substituted  trustee,  does  not  make  the 
whole  fund  in  the  hands  of  the  last  trustee  "gains,  profits, 
and  income,"  within  the  meaning  of  the  income  tax  law.29 
It  is  of  course  possible  that  the  word  "income"  may  be  so 
stretched  as  to  include  even  capital  returned,  if  the  context 
absolutely  requires  such  a  construction.  In  one  case,  on 
the  construction  of  a  statute  authorizing  certain  commis- 
sioners to  deposit  the  "income"  of  a  certain  fund,  it  was 
held  that  the  word  had  the  same  meaning  as  "money"  or 
"receipts,"  and  that  it  was  to  be  interpreted  as  embracing 
all  receipts  of  money,  whether  of  principal  or  interest,  from 
the  mortgages  or  other  securities  in  which  the  fund  had 
been  previously  invested.30  But  this  construction  was 
reached  by  reading  the  statute  with  reference  to  certain  oth- 
er statutes  relating  to  the  same  subject-matter,  and  no  such 
necessity  would  ordinarily  apply  in  the  interpretation  of  in- 
come tax  laws,  where,  on  the  contrary,  the  rule  of  strict 
construction  in  favor  of  the  taxpayer  would  require  a  care- 
ful distinction  to  be  observed  between  capital  and  income. 

§  35.     Rent  of  Land  and  Royalties 

Rent  paid  by  a  tenant  for  the  use  and  occupation  of  real 
estate,  is  always  considered  as  "income"  of  the  lessor,31  and 
this  has  been  specified  as  one  of  the  varieties  of  taxable  in- 
come in  practically  all  of  the  income  tax  laws  which  have 
hitherto  been  enacted.  It  should  be  noted,  however,  that 
the  statute  of  Virginia  excepts  "ground  rents  or  rents 
charge,"  which  is  entirely  proper,  since  the  annual  payments 
under  a  ground  lease  are  not  so  much  to  be  regarded  as 
lent,  or  a  price  paid  for  the  use  of  the  land,  as  in  the  nature 

29  Reynolds  v.  Williams,  4  Bjss:  108,  Fed.  Gas.  No.  11,734. 
so  State  v.  McCarty,  1  Wils.  (Ind.)  205,  219. 
si  Perotz's  Appeal,  102  Pa.  St.  235,  256;    Sohier  v.  Eldredge,  103 
Mass.  345;   Idndley's  Appeal,  13  Wkly.  Notes  Gas.  (Pa.)  65,  69. 

(82) 


Ch.  5)  WHAT    CONSTITUTES    TAXABLE    INCOME  §  35 

of  periodical  installments  of  purchase  money.  In  a  will  or 
a  deed,  the  expression  "yearly  income"  of  real  estate  may 
mean  the  balance  of  what  is  received  in  the  way  of  rent, 
after  deducting  taxes  paid.32  And  the  same  result  is  ef- 
fected under  the  income  tax  laws  by  the  provisions  allowing 
a  deduction  from  the  total  income  of  taxes  paid  within  the 
year  and  also  an  allowance  either  for  depreciation  of  the 
property  from  which  income  is  derived  or  for  its  reasonable 
repair.  Where  farming  land  is  leased  to  be  worked  by  a  ten- 
ant on  shares,  the  income  which  the  lessor  derives  from  it  is 
his  share  or  proportion  of  the  produce,  or  rather,  the  sum 
which  he  realizes  from  the  sale  of  his  part  of  the  produce.33 
It  is  also  held  that  rent  reserved  in  a  lease  of  land  contain- 
ing coal  or  other  minerals,  the  mines  to  be  worked  by  the 
lessee,  is  income  of  the  lessor,  although  it  is  stipulated  to 
be  paid  in  the  form  of  a  royalty  of  so  much  for  each  ton  of 
coal  or  other  mineral  extracted.84  But  this  may  depend  on 
the  intention  of  the  parties  as  to  making  a  lease  proper  or 
a  sale,  and  this  in  turn  may  be  presumed  from  the  form  of 
the  contract  which  they  make.  For  if  the  transaction  takes 
the  form  of  a  sale  of  the  coal  (or  other  mineral)  in  place,  the 
proceeds  received  will  be  a  part  of  the  corpus  of  the  estate, 
that  is,  capital  or  principal,  but  not  income.35  Thus,  a  de- 
mise of  all  the  coal  under  the  surface  of  a  specified  piece  of 
land  is  a  sale  of  the  coal,  not  a  lease,  and  the  sums  due  and 
paid  by  the  lessee  to  the  lessor  as  royalties  are  not  rents, 
and  therefore  not  income,  but  purchase  money  of  real  es- 
tate.86 


32  Inhabitants  of  Freeport  v.  Inhabitants  of  Sidney,  21  Me.  305. 

ss  Thompson's  Appeal,  100  Pa.  St.  478. 

s*  Eley's  Appeal,  103  Pa.  St.  300;  Reynolds  v.  Hanna,  55  Fed.  783, 
797;  Wentz's  Appeal,  106  Pa.  St.  301;  Bedford's  Appeal,  126  Pa. 
St  117,  17  Atl.  538;  Shoemaker's  Appeal,  106  Pa.  St.  392;  McClin- 
tock  v.  Dana,  106  Pa.  St.  386;  Hill  v.  Gregory  [1912]  2  K.  B.  61. 

35  Reynolds  v.  Hanna,  55  Fed.  783. 

se  Fairchild  v.  Fairchild  (Pa.)  9  Atl.  255. 

(83) 


§  36  INCOME    TAXATION  (Ch.  5 

§  36.     Rental  Value  of  Residence 

The  Wisconsin  income  tax  law  of  1911  provides  that  the 
term  "income"  shall  include  the  estimated  rental  value  of 
residence  property  occupied  by  the  owner  thereof,  and  hence 
the  taxpayer  who  owns  the  house  in  which  he  lives  must  in- 
clude in  his  return  of  his  income  the  annual  rent  which  he 
could  or  would  receive  for  the  property  if  he  chose  to  let 
it  and  reside  elsewhere.  This  provision  is  in  accord  with 
the  principles  of  income  taxation  in  England  and  some  other 
foreign  countries,  but  was  not  known  in  American  legisla- 
tion until  introduced  by  the  Wisconsin  statute.  Indeed,  the 
rental  value  of  the  taxpayer's  residence,  when  owned  by  him, 
was  expressly  directed  to  be  excluded  from  the  computation 
of  his  income  by  the  acts  of  Congress  of  1864  and  1870. 
The  validity  of  this  clause  in  the  Wisconsin  law  was  assailed 
on  the  ground  that,  as  such  rental  value  is  not  income  in  any 
proper  sense  of  the  word,  it  could  not  be  made  income  by 
the  mere  declaration  of  the  legislature  that  it  should  be  such. 
But  the  Supreme  Court  of  the  state  saw  nothing  in  this  pro- 
vision to  invalidate  the  statute.  "It  is  said,"  observed  the 
court,  "that  this  is  not  income,  and  that  calling  it  income 
does  not  make  it  income.  It  may  be  conceded  that  things 
which  are  not  in  fact  income  cannot  be  made  such  by  mere 
legislative  fiat,  yet  it  must  also  be  conceded,  we  think,  that 
income  in  its  general  sense  need  not  necessarily  be  money. 
Clearly  it  must  be  money  or  that  which  is  convertible  into 
money."  87  But  this  is  by  no  means  a  satisfactory  way  of 
meeting  the  objection.  The  court  would  have  taken  up 
much  stronger  ground  if  it  had  ruled  that  the  rental  value 
of  an  owner's  residence  is  not  income  at  all,  but  yet  that  it 
is  subject  to  the  tax  because  it  is  so  declared  in  the  statute 
and  because  it  is  a  thing  of  value  which  the  legislature  has 
the  power  and  authority  to  tax,  whether  or  not  it  constitutes 

37  state  v.  Frear,  148  Wis.  456,  134  N.  W.  673,  26  Am.  &  Eng.  Ann. 
Gas.  1147. 

(84) 


Ch.  5)  WHAT    CONSTITUTES    TAXABLE    INCOME  §  36 

income.  On  economic  grounds  such  a  provision  is  more 
easily  defensible.  And  on  this  point  the  court  in  Wisconsin, 
in  the  same  connection,  remarked :  "The  clause  was  doubt- 
less inserted  in  an  effort  to  equalize  the  situation  of  two  men 
each  possessed  of  a  house  of  equal  rental  value,  one  of  whom 
rents  his  house  to  a  tenant,  while  the  other  occupies  his 
house  himself.  Under  the'  clause  in  question,  the  two  men 
with  like  property  are  placed  upon  an  equal  footing,  and  in 
no  other  way  apparently  can  that  be  done."  38  It  is  true 
the  English  and  Scotch  courts  hold  that  the  annual  rental 
value  of  a  house  which  a  man  owns  and  in  which  he  lives, 
and  which  he  could  rent  to  another  if  he  chose,  is  a  part  of 
his  income  for  purposes  of  taxation.39  But  it  is  otherwise  if 
the  house  is  provided  for  him  by  others,  to  be  occupied  dur- 
ing his  life,  but  without  any  power  or  authority  on  his  part 
to  let  it  to  another.40  And  the  advantage  gained,  or  the 
saving  effected,  by  having  the  right  to  occupy  another  per- 
son's house  as  a  residence  free  of  rent, — as  in  the  case  of  a 
manager  of  a  bank  who  has  the  right,  so  long  as  he  con- 
tinues in  his  office,  to  reside  in  the  building  owned  by  the 
bank  and  used  for  its  banking  purposes, — is  not  income  in 
such  sense  as  to  be  taxable.41 

Under  the  income  tax  laws  elsewhere  than  in  Wisconsin, 
it  is  thought  that  this  item  could  not  be  brought  within  the 
definition  of  "income"  by  any  reasonable  or  permissible 
construction.  Thus,  it  has  been  held  (though  not  in  connec- 
tion with  the  subject  of  taxation)  that  neither  the  increased 
value  which  would  accrue  to  lands  of  a  charitable  institution 
if  they  were  used  for  other  purposes  than  the  charity,  nor 
their  use  for  the  purposes  of  the  charity  without  realizing  an 
actual  income,  can  be  regarded  as  "annual  income"  within 

ss  State  v.  Frear,  supra. 

39  Corke  v.  Fry,  32  Scotch  Law  Rep.  341. 

40  McDougall  v.  Sutherland,  31  Scotch  Law  Rep.  630. 

41  Tennant  v.  Smith  [1892]  App.  Cas.  150. 

(85) 


§37  INCOME   TAXATION  (Ch.  5 

the  meaning  of  a  restriction  in  the  charter  of  such  an  institu- 
tion upon  holding  property  which  shall  exceed  a  specified  an- 
nual income.  Annual  income,  it  was  said,  means  annual 
receipts,  and  is  not  the  equivalent  of  annual  value.  And 
even  if  the  value  of  the  use  could  be  regarded  as  annual 
income,  it  should  be  computed,  not  with  reference  to  the 
market  value,  but  to  the  annual  value  to  the  corporation  for 
the  special  purpose  to  which  the  property  was  devoted.42 

§  37.  Salaries  and  Earnings  from  Professions  and  Trades 
A  salary  accruing  to  the  taxpayer,  whether  payable  annually 
or  at  shorter  intervals,  is  taxable  as  a  part  of  his  income,  and 
it  is  immaterial  (except  in  so  far  as  the  statute  makes  express 
exceptions)  whether  he  earns  it  in  the  capacity  of  a  public 
officer  or  as  an  employe  of  a  private  corporation,  or  a  part- 
nership, or  an  individual.43  Thus,  the  pay  of  an  army  officer 
on  the  retired  list  is  "income"  and  taxable  as  such.44  Nor 
does  it  make  any  difference  that  the  amount  of  the  salary 
is  uncertain  or  varies  from  time  to  time,  or  that  it  depends 
on  the  extent  of  services  actually  rendered  or  the  amount  of 
business  transacted,  or  that  it  may  include  commissions  on 
sales.  Whatever  is  received  in  the  course  of  the  year  in  the 
way  of  salary,  wages,  or  compensation  constitutes  a  part  of 
that  year's  income.  Thus,  it  is  said  in  an  English  case  that 
"income"  includes  all  gains  and  profits  derived  from  personal 
exertions,  whether  such  gains  and  profits  are  fixed  or  fluctuat- 
ing, certain  or  precarious,  and  whatever  may  be  the  principle 
or  basis  of  calculation.  Hence  a  locomotive  engineer,  who 
earns  more  than  the  statutory  minimum,  is  taxable,  although 
he  is  not  paid  a  salary  but  so  much  for  every  mile  he  runs 
his  engine.45 

42  Betts  v.  Betts,  4  Abb.  New  Gas.  (N.  Y.)  317. 

43  White  v.  Koehler  (N.  J.)  57  Atl.  124. 
**  In  re  Ward  [1897]  1  Q.  B.  266. 

45  Attorney  General  v.  Ostrum  [1904]  App.  Gas.  144. 

(86) 


Ch.  5)  WHAT    CONSTITUTES    TAXABLE    INCOME  §  38 

So  also  the  earnings  of  professional  men,  such  as  lawyers, 
physicians,  surgeons,  clergymen,  engineers,  architects,  authors, 
and  others,  derived  from  their  professional  employment,  con- 
stitute taxable  income,  if  sufficient  in  amount  to  come  within 
the  terms  of  the  statute,  even  though  not  specifically  men- 
tioned in  it.  And  it  is  immaterial  by  what  name  such  earn- 
ings may  be  called,  or  whether  they  take  the  form  of  a  fixed 
periodical  compensation  or  accrue  in  each  instance  in  consider- 
ation of  particular  services  rendered.  And  the  same  is  true  of 
the  wages  or  earnings  of  mechanics  and  artisans,  if  sufficient 
in  annual  amount  to  come  within  the  purview  of  the  statute, 
as  may  easily  be  the  case  under  some  of  the  state  laws.  And 
in  all  ordinary  cases,  whatever  accrues  to  the  taxpayer  as 
compensation  for  his  personal  exertion  or  endeavor  will  be 
taxable  as  income,  no  matter  what  may  be  the  nature  of 
the  employment  or  pursuit  which  he  follows,  since  the  terms 
of  the  statutes  are  broad  enough  to  cover  almost  every  con- 
ceivable kind  of  activity.  In  an  English  case  it  was  held  that 
betting  on  horse  races,  when  carried  on  systematically  and 
annually  and  as  the  person's  chief  or  only  way  of  gaining 
money,  is  a  "vocation"  within  the  income  tax  law,  and  he 
must  pay  the  tax  on  his  winnings,  if  any.46 

§  38.     Pensions,  Gifts,  Prizes,  and  Awards 

Under  the  English  law  it  is  held  that  the  pension  of  a  re- 
tired judge  or  other  public  officer,  though  voted  annually  by 
the  legislative  authority,  is  taxable  as  income.47  But  a  pen- 
sion not  granted  by  the  government,  but  by  a  private  individ- 
ual or  society,  as  a  purely  voluntary  gift,  and  without  any 
legal  claim  upon  the  donor,  in  recognition  of  meritorious 
past  services  or  for  other  such  reasons,  is  not  a  "profit  or 
gain  arising  from  any  kind  of  property"  or  from  "any  profes- 
sion, trade,  employment,  or  vocation,"  and  is  therefore  not 

46  Partridge  v.  Mallandaine,  L.  R.  18  Q.  B.  Div.  276. 
4T  Ex  parte  Huggins,  L.  R.  21  Ch.  Div.  85. 

(87) 


§38  INCOME    TAXATION  (Ch.  5 

assessable  as  income  of  the  recipient.48  On  the  other  hand,  it 
was  held  that,  where  a  corporation  establishes  a  pension  or 
benefit  fund  for  its  employes,  requiring  each  of  them  to  be- 
come a  subscriber  and  to  contribute  a  certain  percentage  of 
his  salary,  but  contributions  are  returnable  (except  where  for- 
feited for  fraud  or  dishonesty)  either  by  way  of  a  superan- 
nuation benefit,  or  in  a  lump  sum  with  interest  in  case  of  death 
or  retirement,  the  full  salaries  of  the  employes  accrue  to 
them  and  are  assessable  for  the  income  tax,  and  not  merely 
the  amount  received  after  deducting  such  contributions.49  On 
similar  principles  it  is  held  that  a  gift  of  money,  raised  by 
voluntary  subscriptions,  and  made  annually  to  a  minister  of 
religion  by  his  congregation,  is  assessable  as  income,  because 
made  to  him  as  a  minister  and  in  respect  to  the  discharge  of 
his  duties  in  that  office,  which  is  an  "employment"  within  the 
meaning  of  the  statute.50  But  where  a  curate  receives  from 
a  religious  society  a  grant  in  money,  renewable  annually  at 
discretion  and  on  certain  conditions,  and  the  grant  is  in  recog- 
nition of  faithful  services  as  a  clergyman,  but  not  in  respect 
of  the  particular  curacy  which  he  holds,  it  is  held  that  it  is  not 
taxable  as  income.51  So  where  a  portion  of  a  collection  made 
in  church  was  given  by  way  of  an  "Easter  offering"  to  the 
incumbent  of  the  parish  by  reason  of  his  office,  but  the  gift 
would  not  have  been  made  had  not  the  recipient,  besides  be- 
ing the  incumbent,  also  been  poor,  it  was  held  that  the  money 
was  not  given  as  an  additional  remuneration  for  services, 
but  on  account  of  personal  poverty,  and  was  therefore  not 
taxable.52 

Similar  questions  may  arise  in  the  administration  of  the 
income  tax  laws  of  this  country.     Suppose,  for  example,  that 

48  Turner  v.  Cuxon,  L.  R.  22  Q.  B.  Div.  150. 
4»  Hudson  v.  Gribble  [1903]  1  £.  B.  517,  4  Tax  Cas.  522. 
coin  re  Strong,  15  Scotch  Law  Rep.  704,  1  Tax  Cas.  207. 
BI  Turner  v.  Cuxon,  L.  R.  22  Q.  B.  Div.  150. 

52  Turton  v.  Cooper,  5  Tax.  Cas.  138.    But  see  Cooper  v.  Blakiston 
[1909]  App.  Cas.  104,  5  Tax  Cas.  347. 

(88) 


Ch.  5)  WHAT    CONSTITUTES   TAXABLE    INCOME  §  38 

one  receives  a  gift  of  money  from  a  relative,  or  draws  a  prize 
in  a  lottery  or  in  any  form  of  competition,  or  wins  a  bet  on  a 
race  or  at  the  gaming  table,  or  (to  take  a  worthier  illustration) 
receives  an  award  in  money,  not  as  payment  for  services  but 
in  recognition  of  meritorious  conduct  or  achievement  or  dis- 
covery,— such  as  the  Nobel  prize — it  is  clear  that  he  makes  a 
"gain,"  though  not  a  "profit,"  and  that  the  sum  received  is 
"income"  as  distinguished  from  "principal"  or  "capital."  The 
federal  income  tax  law  includes  "the  income  from,  but  not  the 
value  of,  property  acquired  by  gift,  bequest,  devise,  or  de- 
scent." But  aside  from  this  specific  exception,  and  as  the 
problem  might  arise  under  other  taxing  laws,  the  question 
whether  an  acquisition  of  the  kind  supposed  would  be  taxable 
as  income  must  depend  upon  the  construction  of  the  statutes. 
They  contain  terms  broad  enough  to  cover  all  such  cases,  as, 
where  the  act  of  Congress  in  force  declares  that  the  tax  shall 
be  laid  on  "the  entire  net  income  received  from  all  sources," 
and  upon  "gains  or  profits  and  income  derived  from  any 
source  whatever,"  and  the  Wisconsin  statute,  after  enumerat- 
ing certain  items,  taxes  "all  other  income  of  any  kind  derived 
from  any  source  whatever."  If  these  expressions  are  to  be 
construed  as  effective  to  the  full  extent  of  the  language  em- 
ployed, they  would  undoubtedly  include  gifts,  winnings,  and 
pecuniary  awards  or  prizes.  But  if,  following  the  usual  rule 
of  statutory  construction,  the  generality  of  these  expressions 
is  to  be  restricted  by  a  comparison  with  the  more  specific 
terms  used  in  the  context,  then  they  would  include  only  gains 
or  income  from  sources  similar  to,  or  comparable  with,  those 
already  enumerated,  such  as  salaries,  professional  earnings, 
mercantile  business,  invested  capital,  and  so  on.  In  this  case, 
following  the  analogy  of  the  English  cases  above  cited,  it 
seems  that  such  acquisitions  as  those  we  have  instanced  would 
not  be  regarded  as  income. 

The  same  remarks  may  apply  to  a  judgment  for  money,  the 
account  of  which  is  paid  to  the  creditor  within  the  taxing 

(89) 


§  39  INCOME   TAXATION  (Ch.  5 

year.  If  the  cause  of  action  were  an  injury  to  property  or 
contract  rights,  it  might  be  considered  as,  in  some  sense  at 
least,  a  replacement  of  capital.  If  it  were  for  services  ren- 
dered, the  amount  of  the  judgment  would  clearly  be  "compen- 
sation," or  even  "salary"  or  "fees,"  though  recovered  by  suit. 
But  a  judgment  in  an  action  of  tort,  as,  for  example,  defama- 
tion of  character  or  negligence  causing  personal  injuries, 
would  never  be  regarded  as  a  part  of  one's  income  in  the  com- 
mon acceptation  of  the  term,  and  should  not  be  brought  within 
even  the  most  extensive  terms  of  the  statute,  since  a  broad  and 
liberal  construction  in  favor  of  the  government  is  not  the  rule 
in  such  cases,  but  the  reverse. 

§  39.     Legacies  and  Inheritances 

The  income  tax  act  of  Congress  of  1913  expressly  excludes 
from  the  taxpayer's  income  "the  value  of  property  acquired 
by  bequest,  devise,  or  descent."  The  former  act,  that  of  1894, 
on  the  other  hand,  included  "money  and  the  value  of  all 
personal  property  acquired  by  gift  or  inheritance."  There 
was  no  exception  as  to  legacies  or  property  acquired  by 
descent  on  which  an  inheritance  tax  had  already  been  paid, 
though  probably  such  inheritance  tax  itself  might  be  deducted 
under  the  description  of  "taxes  actually  paid."  The  Wis- 
consin statute  of  1911  allows  a  deduction  of  "inheritances, 
devises,  and  bequests  received  during  the  year  upon  which 
an  inheritance  tax  shall  have  been  paid  to  this  state."  It 
appears,  therefore,  that  a  resident  of  Wisconsin  receiving  a 
legacy  from  a  non-resident,  on  which  the  inheritance  tax 
had  been  paid  in  the  state  of  the  decedent's  domicile,  must 
include  the  amount  thereof  in  his  income  for  the  year.  The 
income  tax  law  of  Hawaii  includes  "money  and  the  value  of 
all  personal  property  acquired  by  gift  or  inheritance,"  but 
with  a  proviso  that  there  shall  not  be  included  in  the  income 
of  any  person  or  corporation  "any  bequest  or  inheritance 
otherwise  taxed  as  such."  In  jurisdictions  where  the  matter 
(90) 


Ch.  5)  WHAT    CONSTITUTES   TAXABLE    INCOME  §  4:0 

is  not  thus  provided  for  by  statute,  the  question  of  taxing 
legacies  or  inheritances  as  income  is  not  free  from  doubt,  and 
the  authorities  cast  but  little  light  upon  it.  There  is,  how- 
ever, an  English  case,  in  which  it  was  ruled  that  a  sum  of 
money  acquired  as  a  legacy  is  not  taxable  under  the  de- 
nomination of  "income."  It  was  said  by  Chief  Baron  Kelly : 
"It  would  be  something  startling,  and  almost  ludicrous,  to 
contend  that,  when  a  fortune  is  left  to  an  individual,  if  it 
happened  to  be  in  money,  the  whole  fortune  is  to  be  taken 
as  a  year's  income."  BS  This  was  said  arguendo,  and  is  there- 
fore strictly  speaking  obiter  dictum,  but  the  point  was  well 
brought  out  and  elaborated,  and  the  quotation  clearly  ex- 
presses the  conviction  of  the  court. 

§  40.     Products  of  Agriculture  or  Stock-Raising 

The  profit  derived  by  a  farmer  or  stock-raiser  from  the  sale 
of  the  products  of  the  farm  or  ranch,  that  is,  the  amount  re- 
ceived on  such  sales  less  the  cost  of  production,  constitutes 
income  taxable  under  the  statutes  now  in  force.  In  one 
state,  Virginia,  this  is  specially  provided  for  by  the  statute, 
which  declares  that  "income"  shall  include  "the  amount  of 
sales  of  live  stock  and  meat  of  all  kinds,  less  the  value  assess- 
ed thereon  the  previous  year  by  the  commissioner  of  the 
revenue,"  and  "the  amount  of  sales  of  wood,  butter,  cheese, 
hay,  tobacco,  grain,  and  other  vegetable  and  agricultural  pro- 
ductions during  the  preceding  year,  whether  the  same  was 
grown  during  the  preceding  year  or  not,  less  all  sums  paid 
for  taxes  and  for  labor,  fences,  fertilizers,  clover  and  other 
seed  purchased  and  used  upon  the  land  upon  which  the  vege- 
table and  agricultural  productions  were  grown  or  produced, 
and  the  rent  of  said  land  paid  by  said  person,  if  he  be  not 
the  owner  thereof."  "  Though  the  other  state  statutes  do 

ea  Knowles  v.  McAdam,  L.  R.  3  Ex.  Div.  23,  1  Tax  Cas.  161. 
54  Acts  Virginia  1903,  c.  148,  p.  155,  as  amended  by  Acts  1908,  c. 
10,  p.  20.    See  this  statute  in  full  in  the  appendix  to  this  volume. 

(91) 


§  40  INCOME   TAXATION  (Ch.  5 

not  contain  such  explicit  provisions  as  these,  still  their  terms 
are  broad  enough  to  include  the  profits  of  agriculture  and 
also  to  allow  such  offsets-  as  those  specified  in  the  Virginia 
act,  in  computing  the  net  return.  Thus,  the  Wisconsin  law, 
after  enumerating  certain  sources  of  income,  lays  the  tax 
on  "all  other  income  of  any  kind  derived  from  any  source 
whatever,"  and  allows  the  deduction  of  "the  ordinary  and 
necessary  expenses  actually  paid  within  the  year  in  carrying 
on  the  profession,  occupation,  or  business  from  which  the  in- 
come is  derived."  55  As  to  the  federal  statutes,  the  income 
tax  law  of  1894  contained  a  specific  provision  on  this  subject, 
following  the  example  of  the  income  tax  laws  of  the  Civil 
War  period.  It  directed  that  taxable  income  should  include 
"the  amount  of  sales  of  live  stock,  sugar,  cotton,  wool,  butter, 
cheese,  pork,  beef,  mutton,  or  other  meats,  hay,  and  grain, 
or  other  vegetable  or  other  productions,  being  the  growth  or 
produce  of  the  estate  of  such  person,  less  the  amount  ex- 
pended in  the  purchase  or  production  of  said  stock  or  prod- 
uce, and  not  including  any  part  thereof  consumed  directly  by 
the  family."  56  The  act  of  Congress  now  in  force  omits  these 
particular  provisions  and  reverts  to  the  use  of  more  general 
language.  But  it  cannot  be  doubted  that  it  applies  to  the 
subject  under  consideration,  since  it  declares  that  "the  net  in- 
come of  a  taxable  person  shall  include  gains,  profits,  and  in- 
come derived  from  *  *  *  vocations,  businesses,  trade, 
commerce,  or  sales  or  dealings  in  property  *  *  *  or  the 
transaction  of  any  lawful  business  carried  on  for  gain  or 
profit." 

It  is  to  be  noted  that  so  much  of  the  produce  of  a  farm  as 
is  directly  used  and  consumed  by  the  farmer  and  his  family 
is  not  to  be  reckoned  as  a  part  of  his  income,  even  though  it 

ss  Wisconsin  Income  Tax  Law  1911,  §  1087m,  par.  2,  clause  2f ;  Id., 
§  1087m,  par.  4a.  See  this  statute  in  full  in  the  appendix  to  this 
volume. 

SB  Act  Cong.  Aug.  27,  1894,  §  28,  28  Stat  509. 

(92) 


Ch.  5)  WHAT   CONSTITUTES   TAXABLE    INCOME  §  4:0 

might  have  been  sold,  if  not  so  used,  and  a  profit  derived  from 
it.57  Unsold  and  consumed  in  the  use  by  the  producer,  it 
•cannot  possibly  be  brought  within  any  definition  of  income, 
nor  even  regarded  as  the  source  of  income.  Nor  need  this 
rule  be  affected  by  the  fact  that  the  statute  may  expressly 
forbid  the  deduction  of  "personal,  family,  or  living  expenses," 
as  this  phrase  obviously  relates  to  money  expended  for  such 
purposes. 

In  the  next  place,  grain  or  other  crops  or  live  stock  remain- 
ing in  the  producer's  possession  and  unsold  at  the  end  of  the 
year  are  not  to  be  reckoned  as  a  part  of  the  year's  income. 
This  is  to  be  inferred  from  the  fact  that  those  statutes  which 
have  dealt  specifically  with  this  matter  have  not  directed  that 
the  term  "income"  should  include  the  amount  of  crops  raised, 
etc.,  or  the  value  of  such  productions,  but  only  the  "amount 
of  sales"  thereof,  after  making  the  proper  deductions.  But 
aside  from  this  consideration,  the  rule  is  deducible  from  the 
general  principle  that  a  law  taxing  income  does  not  apply 
to  any  thing  of  value  which,  if  sold,  is  capable  of  producing 
income,  but  which,  remaining  unsold,  is  to  be  regarded  as 
principal  or  at  most  as  a  source  of  income.  In  other  con- 
nections, it  is  true,  the  word  has  sometimes  been  stretched 
to  this  extent.  Thus,  on  the  construction  of  a  statute  pro- 
viding that  a  guardian  should  improve  the  estate  frugally,  and 
apply  the  income  to  the  maintenance  of  the  ward,  it  was  held 
that  this  use  of  the  word  "income"  did  not  require  the  guard- 
ian to  lease  the  real  estate  and  so  derive  an  income  in  cash 
from  it,  but  that  he  might  farm  the  land  himself.58  So,  an 
early  case  in  Maryland  holds  that,  in  a  devise  of  real  and 
personal  estate  and  negroes  in  trust,  the  income  to  be  ap- 
plied for  the  benefit  of  a  certain  beneficiary,  the  word  "in- 

57  Robertson  v.  Pratt,  13  Hawaii,  590;    People  v.  Purdy,  58  Hun 
•<N.  Y.)  386,  12  N.  Y.  Supp.  307. 

58  Remington  v.  Field,  16  R.  I.  509,  17  Atl.  551. 

(93) 


§  41  INCOME   TAXATION  (Ch.  5 

come"  is  broad  enough  to  include  the  increase  of  the  slaves.59 
But  the  rule  of  construction  in  regard  to  a  tax  law  is  not 
the  same  as  that  which  applies  in  the  case  of  a  testamentary 
or  other  trust.  Whatever  latitude  may  be  allowed  in  the  lat- 
ter case,  to  carry  out  the  purpose  of  the  trust,  the  rule  for  a 
statute  imposing  taxes  is  that  the  construction  is  strictly  in 
favor  of  the  taxpayer  and  nothing  is  included  as  taxable  un- 
less plainly  and  distinctly  made  so  by  the  words  of  the  act.80 

§  41.     Produce  of  Mines  and  Oil  and  Gas  Wells 

The  owners  of  mines  producing  coal,  gold,  silver,  or  other 
minerals,  or  of  nitrate  beds  or  other  similar  natural  deposits, 
or  of  oil  or  natural  gas  wells,  are  assessable  for  the  income  tax 
upon  the  net  profits  realized  by  the  sale  of  their  products  in 
each  year.61  The  argument  has  sometimes  been  advanced  that, 
as  minerals  in  place  constitute  a  part  of  the  realty,  and  as  the 
extraction  of  any  given  quantity  leaves  the  investment  of 
the  owner  worth  just  so  much  the  less,  the  sale  of  mineral 
products  should  be  regarded  as  a  sale  of  capital  assets,  and 
not  as  income.  Thus,  in  a  case  in  Pennsylvania,  an  oil  com- 
pany, having  all  its  capital  invested  in  oil-producing  property, 
and  paying  dividends  entirely  out  of  the  products  of  its  oil 
wells,  resisted  payment  of  an  income  tax  assessed  against  it, 
claiming  that  it  could  have  no  taxable  net  income  until  the  pro- 
ceeds of  its  business  had  repaid  all  the  capital  invested,  since, 
in  view  of  the  depletion  of  its  sources  of  revenue,  its  dividends 
paid  included  not  only  earnings  but  also  a  portion  of  its  capital 
returned  in  this  way  to  the  stockholders.  But  the  court  re- 

59  Holmes  v.  Mitchell,  4  Md.  532. 

eo  Supra,   §  29. 

ei  See  Alianza  Co.  v.  Bell  [1906]  App.  Gas.  18;  Rhymney  Iron  Co. 
v.  Fowler  [1896]  2  Q.  B.  79,  3  Tax  Cas.  476;  Knowles  v.  McAdam, 
L.  R.  3  Ex.  Div.  23,  1  Tax  Cas.  161;.  Arizona  Copper  Co.  v.  Smiles, 
29  Scotch  Law  Rep.  134,  3  Tax  Cas.  149;  Stevens  v.  Durban-Roode- 
poort  Gold  Min.  Co.,  5  Tax  Cas.  402;  United  States  v.  Nipissing- 
Mines  Co.,  202  Fed.  803 ;  Commonwealth  v.  Ocean  Oil  Co.,  59  Pa.  St. 
61.  See,  also,  Treasury  Decisions  Nos.  1754  and  1755. 

(94) 


Ch.  5)  WHAT   CONSTITUTES   TAXABLE    INCOME  §  41 

fused  to  accept  this  view,  holding  that  all  the  income  received 
by  the  company  from  its  works,  after  deducting  the  operating 
expenses,  was  net  income  and  taxable  as  such.62  Moreover, 
this  doctrine  is  well  within  the  analogy  and  the  reason  of  the 
well-known  rule  that  in  the  case  of  mining  companies,  quarry 
companies,  and  the  like,  which  have  what  is  called  a  "wasting 
property,"  the  payment  of  dividends  to  the  stockholders  out  of 
the  amount  realized  on  the  sale  of  their  products  is  not  regard- 
ed as  an  impairment  of  capital,  nor  are  such  companies  required 
to  create  a  sinking  fund,  out  of  earnings,  before  declaring 
dividends,  to  offset  the  gradual  depletion  of  the  property  in 
which  the  capital  is  invested.63  So  it  has  been  held  that  the 
income  of  a  decedent's  estate,  as  distinguished  from  the  prin- 
cipal, includes  the  proceeds  of  the  sale  of  oil  produced  after  the 
testator's  death,  accruing  as  royalty  under  an  oil  lease  of  his 
lands  made  by  him  before  his  death  in  consideration  of  a 
royalty  of  part  of  the  oil.64  Further,  the  taxability  of  profits 
derived  from  the  sale  of  minerals  is  recognized  in  the  federal 
income  tax  law  by  the  provision  allowing  a  deduction  "in  the 
case  of  mines,"  for  "depletion  of  ores  and  all  other  natural  de- 
posits on  the  basis  of  their  actual  original  cost  in  cash  or  the 

62  Commonwealth  v.  Ocean  Oil  Co.,  59  Pa.  St.  61. 

es  People  v.  Roberts,  156  N.  Y.  585;  Excelsior  Water  &  Mining  Co. 
v.  Pierce,  90  Cal.  131,  27  Pac.  44 ;  Lee  v.  Neuchatel  Asphalte  Co.,  L. 
R.  41  Ch.  Div.  1.  In  the  case  last  cited  it  was  said:  "If  a  company 
is  formed  to  acquire  and  work  a  property  of  a  wasting  nature,  for 
example,  a  mine,  a  quarry,  or  a  patent,  the  capital  expended  in  ac- 
quiring the  property  may  be  regarded  as  sunk  and  gone,  and  if  the 
company  retains  assets  sufficient  to  pay  its  debts,  it  appears  to  me 
that  there  is  nothing  whatever  in  the  act  to  prevent  any  excess  of 
money  obtained  by  working  the  property  over  the  cost  of  working  it 
from  being  divided  amongst  the  shareholders;  and  this,  in  my  opin- 
ion, is  true  although  some  portion  of  the  property  itself  is  sold,  and 
in  some  sense  the  capital  is  thereby  diminished.  But  it  is,  I  think, 
a  misapprehension  to  say  that  dividing  the  surplus  after  payment  of 
expenses  of  the  produce  of  your  wasting  property  is  a  return  of  cap- 
ital in  any  such  sense  as  is  forbidden  by  the  act." 

e*  In  re  Woodburn's  Estate,  138  Pa.  St.  606,  21  Atl.  16,  21  Am.  St. 
Rep.  932. 

(95) 


§  41  INCOME   TAXATION  (Ch.  5 

equivalent  of  cash."  Naturally  there  must  also  be  deducted 
the  cost  of  production,  that  is,  of  mining  or  extracting  the  ore, 
and  the  taxable  net  income  of  the  owner  will  be  the  price  re- 
ceived on  the  sale  of  his  products  less  these  deductions. 

But  here,  as  in  the  case  of  agricultural  products  discussed  in 
the  preceding  section,  the  measure  of  taxable  net  income  is 
not  the  amount  or  value  of  the  products  of  the  year's  operation, 
but  the  net  proceeds  of  sales,  and  hence  there  should  not  be 
included  any  ores  or  other  products  remaining  unsold  at  the 
close  of  the  year.  And  conversely,  the  year's  income  is  not 
measured  by  the  year's  production.  For  irrespective  of  the 
time  when  the  particular  ores  were  brought  to  the  surface,  their 
proceeds  are  taxable  as  income  of  the  year  in  which  they  are 
sold.  Nor  should  the  estimate  of  income  be  made  to  include 
any  part  of  the  products  of  mines  or  wells  which  is  used  by  the 
owner  in  the  heating,  lighting,  or  operation  of  his  own  plant, 
or  otherwise  consumed  in  aid  of  production.  There  is  one  de- 
cision which  apparently  contravenes  this  last  statement.  Under 
a  state  statute  imposing  a  percentage  tax  on  the  "gross  receipts 
from  total  production"  of  coal  and  other  minerals,  it  was  held 
that  a  railroad  company  is  subject  to  the  tax  on  coal  mined  by 
it  on  its  properties,  though  the  coal  is  not  sold  but  used  in  the 
operation  of  the  road.05  But  the  court  felt  compelled  to  adopt 
this  conclusion  by  a  consideration  of  the  context  and  the  neces- 
sity of  bringing  the  different  provisions  of  the  act  into  harmony 
and  effective  operation.  It  was  said :  "With  respect  to  the  con- 
troversy as  to  the  application  of  the  law  to  coal  mined  and  used 
by  the  railway  company,  no  receipts  being  realized  from  sales, 
the  rule  of  construction  to  be  followed  is  that  all  the  provisions 
relative  to  the  matter  should  be  harmonized  and  given  effect, 
if  that  may  be  done  consistently  with  the  evident  legislative  in- 
tent. The  tax  purports  to  be  laid  upon  a  per  centum  of  the 
'gross  receipts  from  the  total  production  of  coal,'  and  from 
these  words  standing  alone  a  meaning  might  be  extracted  that 

«s  Missouri,  K.  &  T.  Ry.  Co.  v.  Meyer,  204  Fed.  140. 
(96) 


Ch.  5)  WHAT    CONSTITUTES   TAXABLE    INCOME  §  42 

only  taxation  based  upon  sales  was  contemplated.  But  the  tax 
is  payable  by  all  persons  engaged  in  the  mining  or  production 
of  coal,  etc.,  and  not  in  selling  it.  A  sworn  return  is  exacted 
showing  the  location  of  the  mine  or  well,  the  kind,  the  gross 
production,  actual  cash  value,  and  other  information,  and  while 
the  auditor  is,  under  the  same  section,  authorized  to  ascertain 
the  gross  receipts  and  compute  the  tax,  the  next  section  em- 
powers him  to  ascertain  the  amount  and  value  of  production, 
compute  the  tax,  etc.  And  section  7708,  in  providing  for  a  re- 
bate of  taxes  when  asphalt,  ores,  or  petroleum,  or  other  min- 
erals, have  been  manufactured  or  refined,  contemplates  a  tax 
irrespective  of  sale  of  the  natural  product  and  not  dependent 
on  the  sale  after  it  has  been  manufactured  or  refined.  The  in- 
tent, from  the  several  provisions  taken  together,  seems  there- 
fore manifest  to  provide  for  the  collection  of  a  tax,  whether 
the  mineral  is  put  on  the  market  or  used  by  the  producer,  and 
by  the  expression  'gross  receipts  from  total  production'  to  refer 
to  equivalents  in  either  case,  and  accomplish  the  object  of  ob- 
taining revenues  from  all  production  of  mineral,  regardless  of 
use.  This  conclusion  appears  to  be  necessary,  notwithstanding 
the  conceded  principles  that  taxes  must  be  imposed  by  law,  and 
that  the  law  should  be  construed  favorably  to  the  taxpayer  and 
not  extended  by  implication  beyond  its  clear  intent." 

§  42.     Profits  of  Mercantile  Business 

In  so  far  as  the  income  tax  falls  upon  the  profits  of  a  mer- 
chant, the  amount  of  it  is  not  dependent  on  or  estimated  by  the 
amount  of  his  gross  sales  or  gross  receipts,  but  the  taxable  in- 
come is  that  derived  from  sales  of  goods  made  in  excess  of 
their  cost,  after  deducting  from  the  income  or  profits  the  ex- 
penses and  other  items  allowed  by  the  statute.68  The  deduc- 
tions ordinarily  allowed  include  interest  on  borrowed  capital, 
taxes  paid,  losses  incurred  which  are  not  compensated  by  in- 
surance or  otherwise,  bad  debts  written  off,  and  depreciation 

ee  Millar  v.  Douglass,  42  Tex.  288. 

BL.INC.TAX. — 1  (97) 


§  43  INCOME    TAXATION  (Ch.  5 

of  property.  Besides,  the  statutes  allow  a  deduction  of  "neces- 
sary expenses  actually  paid  in  carrying  on  the  business,"  as  in 
the  federal  statute,  or  "the  ordinary  and  necessary  expenses 
actually  paid  within  the  year  in  carrying  on  the  business  from 
which  the  income  is  derived,"  as  in  the  Wisconsin  statute. 
These  expenses,  in  the  case  of  ordinary  mercantile  business, 
will  include  such  items  as  the  prime  cost  of  goods,  salaries  and 
wages  of  employes,  freight,  advertising,  insurance,  and  the  like. 
But  it  must  be  observed  that  the  income  from  a  mercantile  busi- 
ness, under  the  tax  law,  is  not  merely  the  profit  arising  from 
the  sale  of  that  particular  stock  of  goods  which  the  merchant 
had  on  hand  at  the  beginning  of  the  tax  year,  but  it  is  the  net 
profit  arising  from  the  whole  year's  commercial  dealings  in  the 
goods  handled  by  the  merchant,  no  matter  how  often,  in  the 
course  of  the  year,  his  stock  may  have  been  depleted,  wholly 
or  in  part,  and  renewed.67 

§  43.     Profits  from   Unauthorized  Business 

It  is  held  that  where  a  state  tax  is  laid  upon  the  gross  re- 
ceipts or  the  net  income  of  corporations,  or  upon  the  volume 
of  business  transacted  by  them  as  measured  by  such  receipts 
or  income,  it  may  include  and  apply  to  receipts  by  the  com- 
pany derived  from  a  business  beyond  its  charter  powers  or  in 
which  it  had  no  authority  to  engage.68  And  so  it  was  ruled 
that  a  corporation  cannot  escape  payment  of  United  States 
internal  revenue  taxes  on  the  ground  that  the  business  in 
which  it  is  engaged,  or  from  which  its  profits  or  income  are 
derived,  is  unauthorized  by  its  charter  or  by  the  laws  of  the 
state,  or  is  otherwise  ultra  vires.69  It  is  undoubtedly  proper 
to  apply  these  rulings  to  the  assessment  of  federal  and  state 
income  taxes.  It  is  true  the  act  of  Congress  refers  to  profits 

67  Wilcox  v.  Middlesex  County  Com'rs,  103  Mass.  544. 

es  People  v.  Roberts,  32  App;  Div.  113,  52  N.  Y.  Supp.  859,  affirmed, 
157  N.  Y.  677,  51  N.  E.  1093. 

69  Salt  Lake  City  v.  Hollister,  118  U.  S.  256,  6  Sup.  Ct.  1055,  30  L. 
Ed.  176. 

(98) 


Ch.  5)  WHAT    CONSTITUTES    TAXABLE    INCOME  §  44 

derived  from  the  transaction  of  "lawful"  business.  But  a  busi- 
ness may  be  none  the  less  lawful  because  it  is  beyond  the  lim- 
ited powers  of  a  particular  corporation  engaging  in  it.  And 
it  is  probable  that  the  word  quoted  was  meant  only  to  exclude 
those  occupations  which  are  forbidden  to  all  persons,  as  being 
immoral  or  contrary  to  public  policy,  and  the  reason  for  ex- 
cluding them  was  the  apprehension  that  taxing  them  might 
appear  to  legalize  them. 

§  44.     Income  from  Partnership  Business 

The  profit  accruing  from  one's  share  in  the  business  con- 
ducted by  a  partnership  is  a  part  of  his  income.70  The  net 
earnings  of  the  partnership  constitute  income  of  the  firm  so 
long  as  they  remain  in  the  possession  or  to  the  credit  of  the 
firm  as  such.  But  when  a  proportionate  part  is  drawn  out 
and  paid  over  to  an  individual  partner,  it  becomes  and  con- 
stitutes a  part  of  his  private  income.  And  although  an  in- 
terest in  the  stock  in  trade  of  a  partnership  or  in  the  business 
which  it  conducts  may  represent  an  investment  of  capital,  and 
therefore  be  "principal"  or  "capital"  of  the  partner,  it  does 
not  follow  that  his  share  of  the  earnings  is  impressed  with  the 
same  character.  On  the  contrary,  the  dividends  of  a  partner- 
ship in  which  a  decedent  was  interested,  and  which  was  con- 
tinued after  his  death,  have  been  held  not  to  constitute  a  part 
of  the  corpus  of  his  estate,  any  more  than  interest  on  money 
constitutes  a  portion  of  the  principal  invested ;  but  such  divi- 
dends are  income  and  go  to  the  life  tenant  or  beneficiary  un- 
der a  trust.71  It  is  true,  however,  that  it  would  be  unjust  and 
double  taxation  to  assess  a  partnership  upon  its  income  de- 
rived from  its  business,  and  then  to  tax  each  partner  for  his 
share  of  the  profits  as  constituting  his  individual  income.  But 
this  matter  has  generally  been  provided  for  in  the  statutes. 


TO  in  re  Rogers,  37  Misc.  Rep.  (N.  Y.)  54,  74  N.  Y.  Supp.  829;  In  re 
Slocum,  169  N.  Y.  153,  62  N.  E.  130. 

7i  Heighe  v.  Littig,  63  Md.  301,  52  Am.  Rep.  510. 

(90) 


§44  INCOME   TAXATION  (Ch.  5 

The  act  of  Congress  does  not  tax  partnerships  at  all.  The 
Wisconsin  statute  taxes  partnerships  as  well  as  individuals 
and  corporations,  but  the  individual  is  allowed  to  deduct  from 
his  taxable  income  "dividends  or  income  received"  from  an 
"interest  in  any  firm  or  copartnership,  the  income  of  which 
shall  have  been  assessed  under  the  provisions  of  this  act."  If 
the  other  existing  statutes  leave  the  subject  in  doubt,  still  it  is 
thought  that  no  court  would  sustain  the  attempt  to  assess  and 
collect  the  tax  twice  upon  the  same  income. 

As  to  the  undivided  earnings  of  a  partnership,  it  is  true,  as 
above  stated,  that  they  properly  constitute  income  of  the  firm 
but  not  of  the  individual  partners.  Nevertheless,  the  act  of 
Congress  subjects  them  to  taxation  in  the  names  of  the  part- 
ners. The  provision  is  as  follows :  "Any  persons  carrying  on 
business  in  partnership  shall  be  liable  for  income  tax  only  in 
their  individual  capacity,  and  the  share  of  the  profits  of  a 
partnership  to  which  any  taxable  partner  would  be  entitled  if 
the  same  were  divided,  whether  divided  or  otherwise,  shall 
be  returned  for  taxation  and  the  tax  paid,  under  the  provisions 
of  this  section,  and  any  such  firm,  when  requested  by  the 
Commissioner  of  Internal  Revenue,  or  any  district  collector, 
shall  forward  to  him  a  correct  statement  of  such  profits  and 
the  names  of  the  individuals  who  would  be  entitled  to  the 
same,  if  distributed." 

§  45.     Profits  on  Sale  of  Real  Estate 

Where  a  parcel  of  real  estate  is  sold  for  a  price  above  its 
cost,  the  difference  is  not  properly  "income"  of  the  vendor. 
It  is  more  correctly  described  as  an  increase  of  capital  assets. 
But  it  is  certainly  a  "gain"  or  "profit,"  and  falls  within  the 
meaning  of  either  of  those  terms  as  used  in  the  income  tax 
laws.  And  it  has  always  been  the  policy  of  such  laws  to  as- 
sess the  tax  on  a  profit  thus  .made,  though  it  has  been  usual  to 
set  a  limitation  upon  the  time  elapsing  between  the  purchase 
and  sale  of  the  property,  since  land  is  often  held  for  long  pe- 
riods and  the  increase  in  its  value,  in  ordinary  cases,  may  be 

(100) 


Ch.  5)  WHAT    CONSTITUTES    TAXABLE    INCOME  §  45 

supposed  to  have  been  gradually  accruing  during  the  entire 
time.  The  federal  income  tax  law  of  1864  provided  that  "net 
profits  realized  by  sales  of  real  estate  purchased  within  the 
year  for  which  income  is  estimated  shall  be  chargeable  as  in- 
come." The  act  of  1870  included  in  the  description  of  tax- 
able income  "profits  realized  within  the  year  from  sales  of  real 
estate  purchased  within  two  years  previous  to  the  year  for 
which  income  is  estimated."  The  act  of  1894  taxed  "profits 
realized  within  the  year  from  sales  of  real  estate  purchased 
within  two  years  previous  to  the  close  of  the  year  for  which 
income  is  estimated."  As  to  the  state  statutes,  that  of  Wis- 
consin expressly  includes  as  taxable  income  "all  profits  de- 
rived from  the  purchase  and  sale  of  any  property  acquired 
within  three  years  previous,"  and  this  is  construed  by  the  state 
tax  commission  as  referring  to  capital  assets  and  not  to  or- 
dinary stocks  of  merchandise,  and  therefore  it  would  be  ap- 
plicable to  real  estate.  The  income  tax  law  of  Hawaii  en- 
umerates in  the  classes  of  taxable  income  "profits  realized 
within  the  year  from  sales  of  real  estate,  including  leaseholds, 
purchased  within  two  years."  The  statutes  of  the  other  states 
contain  no  specific  provision  as  to  the  profits  on  sales  of  land, 
but  their  general  terms  are  broad  enough  to  include  this  case. 
The  act  of  Congress  of  1913  contains  the  following  very 
ambiguous  clause :  "The  net  income  of  a  taxable  person  shall 
include  gains,  profits,  and  income  derived  from  *  *  *  sales 
or  dealings  in  property,  whether  real  or  personal,  growing  out 
of  the  ownership  or  use  of  or  interest  in  real  or  personal  prop- 
erty." As  to  the  latter  part  of  this  sentence,  though  it  is  dif- 
ficult to  discern  any  precise  meaning  in  it,  one  may  hazard  the 
guess  that  it  was  intended  to  apply  to  the  purchase  and  sale 
of  leaseholds,  life  estates,  undivided  joint  interests,  and  other 
estates  less  than  a  fee.  Another  possible  construction  might 
be  suggested,  and  one  which  would  give  meaning  and  effect 
to  the  whole  sentence.  This  might  be  accomplished  by  read- 
ing the  word  "or"  into  the  clause  between  the  words  "per- 

(101) 


§  45  INCOME   TAXATION  (Ch.  5 

sonal"  and  "growing,"  as  having  been  inadvertently  omitted, 
and  by  a  slight  transposition  of  some  of  the  other  terms.  The 
sentence  would  then  read :  "The  net  income  of  a  taxable  per- 
son shall  include  gains,  profits,  and  income  derived  from 
*  *  *  sales  or  dealings  in  property,  whether  real  or  personal, 
or  growing  out  of  the  ownership  or  use  of  real  or  personal 
property  or  an  interest  therein."  As  thus  reconstructed,  the 
provision  would  lay  the  tax  on  what  is  called  the  "unearned 
increment"  of  land,  that  is,  an  increase  in  its  market  value, 
accruing  within  the  year  from  any  other  cause  than  its  im- 
provement by  the  owner,  or  the  corresponding  profit  or  ad- 
vantage to  the  owner,  in  view  of  the  fact  that  he  could  now 
command  a  higher  price  for  it  than  formerly,  although  he 
does  not  actually  realize  his  profit  by  selling  the  property,  but 
continues  to  hold  it.  But  since  this  would  greatly  enlarge  the 
scope  of  the  statute,  and  subject  to  taxation  various  items 
which  would  be  exempt  under  any  other  interpretation,  it  is 
doubtful  whether  the  courts  would  feel  justified  in  taking  this 
course  with  it. 

The  term  "dealings"  has  a  definite  meaning  in  law.  It  is 
equivalent  to  "traffic."  It  does  not  apply  to  the  operations  of 
one  who  buys  to  keep,  though  he  may  afterwards  sell,  but  to 
the  buying  of  any  kind  of  property  or  commodity  for  the  pur- 
pose of  selling  again  at  a  profit,  and  that,  not  merely  on  a 
single  occasion,  but  as  an  occupation  or  pursuit;  or  in  other 
words,  "dealing"  in  any  article  is  making  successive  purchases 
and  sales  of  it  as  a  business.72  It  appears  therefore  that  where 
one  purchases  a  piece  of  real  estate  for  residence  purposes 
or  as  an  investment,  and  sells  it  for  a  higher  price  than  he 
paid,  the  profit  must  be  included  in  his  taxable  income  for  that 

72  See  Clifford  v.  State,  29  Wis.  327;  Saunders  v.  Russell,  10  Lea 
(Term.)  293;  Bates  v.  Bank  of  Alabama,  2  Ala.  451;  Buckley  v. 
Briggs,  30  Mo.  452 ;  Norris  v.  Commonwealth,  27  Pa.  St  494 ;  Over- 
all v.  Bezeau,  37  Mich.  506;  State  v.  Barnes,  126  N.  C.  1063,  35  S. 
E.  605;  Vernon  v.  Manhattan  Co.,  17  Wend.  (N.  Y.)  524;  Goodwin 
v.  Clark,  65  Me.  280. 

(102) 


Ch.  5)  WHAT    CONSTITUTES    TAXABLE    INCOME  §  4:5 

year.  It  might  be  argued  that  the  word  "sales"  should  take 
color  from  the  word  "dealings"  with  which  it  is  associated. 
But  it  seems  more  probable  that  the  legislative  intention  was 
to  tax  not  only  profits  arising  from  dealing  in  real  estate  as  a 
business,  but  also  the  profit  accruing  on  single  or  isolated 
sales,  not  frequent  enough  to  constitute  dealing  in  it,  and  that 
the  words  were  placed  in  juxtaposition  to  mark  this  distinc- 
tion. The  term  "dealings"  may  be  applied  to  one  who  buys 
and  sells  land  as  a  speculation,  or  who  buys  vacant  land  and 
builds  houses  on  it  for  the  purpose  of  selling  the  property  as 
so  improved,  or  buys,  opens  up,  and  sells  suburban  property, 
or  otherwise  derives  his  income  or  a  considerable  part  of  it 
from  traffic  in  real  estate. 

The  construction  which  the  English  courts  have  put  upon 
the  income  tax  law  of  that  country  excludes  the  profit  arising 
from  a  single  sale  of  land,  while  including  profits  derived  from 
buying  and  selling  realty  as  a  business.  In  a  leading  case,  it 
appeared  that  a  company  was  formed  to  buy  land  in  the  Ma- 
lay Peninsula  and  there  plant  and  cultivate  rubber  trees.  It 
bought  two  estates  and  planted  a  considerable  acreage,  but 
did  not  produce  or  sell  any  rubber.  Then,  its  capital  being  ex- 
hausted, it  sold  the  entire  property  to  another  company  for  a 
price  exceeding  the  amount  of  capital  expended.  It  was  held 
that  the  profit  arising  from  the  sale  was  an  appreciation  of 
capital,  and  not  taxable  as  income.  In  delivering  judgment, 
Lord  Salvesen  said :  "I  am  unable  to  distinguish  the  position 
of  the  appellants  from  that  of  a  person  who  acquires  a  prop- 
erty by  way  of  investment  and  who  realizes  it  afterwards  at 
a  profit.  It  is  well  settled  that  in  such  a  case  the  profit  is  not 
part  of  the  person's  annual  income  liable  to  be  assessed  for 
income  tax,  but  results  from  an  appreciation  of  his  capital.  No 
doubt  if  it  is  a  part  of  his  business  to  deal  in  lands  or  invest- 
ments, any  profits  which  in  the  course  of  that  business  he 
realizes  form  part  of  his  income;  but  the  mere  fact  that  a  per- 
son or  company  has  invested  funds  in  the  purchase  of  an  es- 

(103) 


§  46  INCOME   TAXATION  (  Ch. 

tate  which  has  subsequently  appreciated,  and  so  has  realized  a 
profit  on  his  purchase,  does  not  make  that  profit  liable  to  as- 
sessment." 73 

§  46.     Profits  on  Sales  of  Securities 

In  the  general  law  (apart  from  matters  of  taxation)  an 
addition  to  one's  wealth  obtained  by  selling  stocks,  bonds,  or 
any  other  form  of  securities  or  investments  at  a  price  above 
their  cost  is  not  "income"  but  an  appreciation  of  capital. 
Nor  is  it  "profit"  in  the  ordinary  or  commercial  sense.  Profit 
is  the  acquisition  of  gain  above  expenditures  arising  from 
some  transaction  or  operation,  and  does  not  include  premiums 
received  on  the  sale  of  securities.74  A  similar  rule  prevails 
in  the  law  of  trusts  and  of  wills.  Thus,  where  a  trustee  in- 
vests money  of  the  trust  estate  in  bonds,  and  subsequently 
sells  the  bonds  at  an  advance,  and  invests  the  proceeds  in 
other  securities,  the  profit  on  the  bonds  is  part  of  the  prin- 
cipal of  the  estate,  and  not  income,  as  between  the  life  tenant 
and  the  remainderman.75  So  the  words  "dividends  and  in- 
come" in  a  will  devising  property  in  trust,  the  dividends  and 
income  thereof  to  be  paid  to  the  testator's  daughter,  with 
remainder  over  after  her  death,  do  not  include  the  increase 
in  the  value  of  the  corpus  of  the  estate  caused  by  the  invest- 
ment of  the  funds  and  stocks  and  their  sale  and  investment 
in  other  stocks  at  a  profit.76  But  it  seems  that  the  "profits 
and  income"  of  an  estate  devised  in  trust  for  a  named  bene- 
ficiary will  include  the  profits  made  on  land  purchased  by  the 
executor  at  a  foreclosure  sale  of  a  mortgage  to  secure  a  loan 
of  the  funds  of  the  estate.77 

73  Tebrau  Rubber  Syndicate  v.  Farmer,  5  Tax  Cas.  658. 
i*  Cross  v.  Long  Island  Loan  &  Trust  Co.,  75  Hun  (N.  T.)  533,  27 
N.  Y.   Supp.  495. 

TO  in  re  Graham's  Estate,  198  Pa.  St.  216.  47  Atl.  1108. 

76  Smith  v.  Hooper,  95  Md.  16,  51  Atl.  844;   Eley's  Appeal,  103  Pa. 
St  300. 

77  in  re  Park's  Estate,  173  Pa.  St.  190,  33  Atl.  884. 

(104) 


Ch.  5)  WHAT    CONSTITUTES    TAXABLE    INCOME  §  46 

In  the  English  law  of  taxation,  a  profit  realized  from  the 
sale  of  securities  is  not  reckoned  as  income,  except  in  cases 
where  the  person  pursues  the  buying  and  selling  of  securi- 
ties as  a  business  or  occupation.  "It  is  quite  a  well-settled 
principle  in  dealing  with  questions  of  assessment  of  income 
tax,  that  where  the  owner  of  an  ordinary  investment  chooses 
to  realize  it,  and  obtains  a  greater  price  for  it  than  he  orig- 
inally obtained  it  at,  the  enhanced  price  is  not  profit  in  the 
sense  of  the  income  tax  law.  But  it  is  equally  well  settled 
that  enhanced  values  obtained  from  realization  or  conversion 
of  securities  may  be  so  assessable,  where  what  is  done  is  not 
merely  a  realization  or  change  of  investment,  but  an  act 
done  in  what  is  truly  the  carrying  on,  or  carrying  out,  of  a 
business.  The  simplest  case  is  that  of  a  person  or  associa- 
tion of  persons  buying  and  selling  lands  or  securities  spec- 
ulatively,  in  order  to  make  gain,  dealing  in  such  investments 
as  a  business,  and  thereby  seeking  to  make  profits.  There 
are  many  companies  which  in  their  very  inception  are  formed 
for  such  a  purpose,  and  in  these  cases  it  is  not  doubtful  that, 
where  they  make  a  gain  by  a  realization,  the  gain  they  make 
is  liable  to  be  assessed  for  income  tax.  What  is  the  line  that 
separates  the  two  classes  of  cases  may  be  difficult  to  define, 
and  each  case  must  be  considered  according  to  its  facts,  the 
question  to  be  determined  being:  Is  the  sum  of  gain  that 
has  been  made  a  mere  enhancement  of  value  by  realizing  a 
security,  or  is  it  a  gain  made  in  the  operation  of  business 
in  carrying  out  a  scheme  for  profit-making?"  78  So  where  a 
person  buys  a  doubtful  debt  and  recovers  a  larger  sum  than 
he  paid  for  it,  the  gain  is  not  profit  in  the  sense  of  the  in- 
come tax  law,  unless  the  purchaser  is  making  a  trade  of  buy- 
ing such  debts.79  But  on  the  other  hand,  where  a  company 
is  empowered  by  its  charter  to  vary  its  investments,  and  gen- 

78  Calif ornian  Copper  Syndicate  v.  Harris,  6  Fraser.  894,  5  Tax 
Cas.  159 ;    Tebrau  Rubber  Syndicate  v.  Farmer,  5  Tax  Cas.  658. 
i »  Assets  Co.  v.  Inland  Revenue  [1897]  W.  N.  144. 

(105) 


§  46  INCOME   TAXATION  (Ch.  5 

erally  to  sell  or  exchange  any  of  its  assets,  the  net  gain  by 
realizing  investments  at  larger  prices  than  were  paid  for 
them  constitutes  profit  chargeable  with  income  tax.80 

In  this  country,  however,  under  both  the  federal  and  state 
income  tax  laws,  dealing  as  they  do  with  income  or  profit  from 
the  "sale  of  property,"  it  is  difficult  to  see  how  the  premium 
obtained  on  even  a  single  sale  of  stock,  or  of  a  bond  or  other 
security,  could  escape  assessment.  Under  the  income  tax  laws 
of  1861  to  1870,  it  was  held  that  a  bona  fide  exchange  of 
stocks  for  other  property,  however  much  to  the  apparent 
advantage  of  the  owner  of  the  stocks,  was  not  a  sale  thereof 
from  which  a  profit  was  derived  liable  to  taxation  as  income. 
But  a  transfer  of  stocks  for  a  promissory  note,  which  is 
collectible,  or  an  exchange  thereof  for  land,  followed  by  a 
sale  of  such  land  within  the  year,  whether  for  cash  or  collect- 
ible promissory  notes,  was  considered  as  equivalent  to  a  sale 
of  such  stock  for  so  much  cash.81  But  in  view  of  the  limi- 
tation of  time  in  those  statutes,  it  was  held  that  the  profit  made 
upon  bonds  bought  in  one  year  and  sold  several  years  later 
was  not  to  be  included  in  the  estimate  of  the  owner's  income 
for  the  year  in  which  the  sale  was  made.82  It  will  be  noticed, 
however,  that  there  is  no  limitation  of  time  in  the  present 
federal  income  tax  law,  while  that  prescribed  by  the  Wisconsin 
statute  is  three  years. 

§  47.     Increase  in  Value  Not  Realized  by  Sale 

In  the  law  of  trusts,  an  increase  in  the  market  value  of 
securities  of  any  kind  held  as  investments  is  not  accounted  a 
part  of  the  income  of  the  same,  nor  is  it  to  be  added  to  the 
stated  interest  which  they  return  in  computing  the  income. 
Even  if  the  securities  are  sold,  and  the  increment  of  value 
thus  converted  into  money,  it  is  not  properly  speaking  a 

so  Scottish  Investment  Trust  Co.  v.  Forbes,  31  Scotch  Law  Rep. 
219,  3  Tax  Cas.  231. 

si  United  States  v.  Smith,  1  Sawy.  277,  Fed.  Cas.  No.  16,341. 
82  Gray  v.  Darlington,  15  Wall.  63,  21  L.  Ed.  43. 

(100) 


Ch.  5)  WHAT    CONSTITUTES   TAXABLE    INCOME  §  47 

"profit,"  as  we  have  shown  in  the  preceding  section.  For 
an  even  stronger  reason,  therefore,  it  cannot  be  either  a 
"profit"  or  a  "gain"  so  long  as  not  realized  by  sale.  It  is 
merely  an  appreciation  of  capital.  "The  rule,  as  settled,  may 
be  stated  to  be  that  an  increase  from  natural  causes  in  the 
value  of  real  and  personal  estate  held  as  an  investment  does 
not  constitute  profits,  to  go  to  a  life  tenant,  but  becomes 
principal  and  goes  to  the  remainderman."  83  Thus,  a  life  ten- 
ant entitled  to  the  income  of  a  certain  legacy,  which  was  in- 
vested, was  held  not  entitled  to  the  gain  over  the  original 
amount  invested,  arising  from  an  increase  in  the  value  of  the 
subject  of  the  investment  as  it  existed  in  the  life-time  of  the 
testator.84  But  a  more  direct  authority  for  the  application 
of  these  principles  to  the  subject  of  income  taxation  is  found 
in  a  decision  of  the  United  States  Supreme  Court,  construing 
the  act  of  Congress  of  1864  imposing  taxes  on  "gains,  profits, 
and  income."  It  was  held  that  a  mere  increase  in  the  market 
value  of  securities  does  not  come  within  the  definition  of 
any  one  of  those  terms,  and  specifically,  that  the  word  "gains," 
as  used  in  the  statute,  means  such  gains  or  profits  as  may  be 
realized  from  a  business  transaction  begun  and  completed 
during  the  preceding  year.  The  court  said :  "The  mere  fact 
that  property  has  advanced  in  value  between  the  date  of  its 
acquisition  and  sale  does  not  authorize  the  imposition  of  the 
tax  on  the  amount  of  the  advance.  Mere  advance  in  value 
in  no  sense  constitutes  the  gains,  profits,  or  income  specified 
by  the  statute.  It  constitutes  and  can  be  treated  merely  as 
increase  of  capital."  8B  Notwithstanding  this,  the  officers  of 
the  treasury  department  applied  a  different  construction  to 
the  corporation  excise  tax  law  of  1909,  which  specified,  as 

ss  in  re  Vedder,  2  Con.  Sur.  (N.  Y.)  548,  15  N.  Y.  Supp.  798.  And 
see  In  re  Gerry,  103  N.  Y.  445,  9  N.  E.  235;  Jennery  v.  Olmstead, 
36  Hun  (N.  Y.)  536 ;  In  re  Proctor,  85  Hun  (N.  Y.)  572,  33  N.  Y.  Supp. 
196;  Linsly  v.  Bogert,  87  Hun  (X.  Y.)  137,  33  N.  Y.  Supp.  975. 

s*  Thomson's  Estate,  11  Pa.  Co.  Ct.  R.  198. 

ss  Gray  v.  Darlington,  15  Wall.  63,  21  L.  Ed.  45. 

(107) 


§  4:8  INCOME   TAXATION  (Ch.  5 

the  measure  of  taxation,  the  "net  income"  of  the  corporation, 
above  a  certain  amount,  "received  from  all  sources,"  a  nar- 
rower expression,  it  will  be  noticed,  than  that  of  the  income 
tax  law.  They  ruled  that  a  corporation  must  return,  in  its 
estimate  of  net  income,  not  only  profits  realized  on  the  sale 
of  real  estate  during  the  year,  but  also  an  increase  in  the 
value  of  unsold  property,  if  taken  up  on  the  books  of  the 
corporation;  and  that  any  increase  in  the  value  of  the  capi- 
tal assets,  as  determined  by  a  physical  revaluation,  and  taken 
cognizance  of  by  the  corporation  in  book  entries,  is  gain  and 
must  be  accounted  for  as  income  for  the  year  in  which  such 
increase  is  so  recognized  and  recorded.86  And  it  must  further 
be  remarked  that,  if  the  courts  should  eventually  adopt  such 
a  construction  of  the  act  of  Congress  of  1913  as  would  per- 
mit the  taxation  of  the  "unearned  increment"  of  land,  as 
suggested  above  (supra,  §  45),  it  is  probable  that  the  same 
principle  would  have  to  be  applied  to  the  increase  in  value 
of  securities,  since  the  statute,  at  this  point,  carefully  speci- 
fies both  real  and  personal  property  as  sources  of  gains,  prof- 
its, or  income. 

§  48.     Uncollected  Interest  and  Accounts 

It  is  an  unsettled  question  whether  a  person's  income  for  a 
given  year  should  be  held  to  include  interest  on  securities 
accruing  within  the  year  but  remaining  uncollected  at  its 
close,  and  promissory  notes  and  due-bills  taken  in  discharge 
of  a  pre-existing  indebtedness,  but  not  paid  within  the  year 
in  which  they  are  given,  and  the  price  of  goods  sold  within 
the  year,  evidenced  by  book  entries,  but  not  received  in 
cash.  Some  of  the  statutes  have  expressly  included  such 
items ;  others  have  not  mentioned  them.  Thus,  the  act  of 
Congress  of  1864  laid  the  tax,  among  other  things,  on  "in- 
terest received  or  accrued  upon  all  notes,  bonds,  and  mort- 
gages, or  other  forms  of  indebtedness  bearing  interest,  wheth- 

se  Treasury  Decision  No.  1742,  pars.  43,  48,  and  85. 
(10S) 


Ch.  5)  WHAT    CONSTITUTES   TAXABLE    INCOME  §  48 

er  paid  or  not,  if  good  and  collectible."  And  the  same  lan- 
guage was  included  in  the  act  of  1870  and  in  that  of  1894. 
It  will  be  noticed  that  this  specified  only  "interest,"  and  as 
to  notes  and  accounts,  the  courts  did  not  agree.  In  one 
case  it  was  held  that,  within  the  meaning  of  the  statute,  the 
word  "income"  must  be  taken  to  mean  money,  and  not  the 
expectation  of  receiving  it  or  the  right  to  receive  it  at  a  fu- 
ture time.  And  hence  it  was  ruled  that  the  amount  of  a 
promissory  note  taken  in  1871  on  the  sale  of  a  patent  right, 
but  not  due  until  1872,  and  paid  in  the  latter  year,  was  not 
taxable  as  income  of  the  former  year.87  But  in  another  case 
it  was  said  that  promissory  notes,  book  accounts,  and  the 
like,  due  during  a  given  year,  may  or  may  not  be  income  of 
that  year.  This  depends  on  their  value  intrinsically  or  their 
convertibility  into  money,  property,  or  available  assets.  If 
they  have  only  a  nominal,  and  not  a  real  value  or  converti- 
ble quality,  and  a  man  has  realized  nothing  from  them, 
and  therefore  does  not  return  them  as  a  part  of  his  income, 
because  he  honestly  believes  that  they  are  not  real  gains  or 
profits,  he  cannot  be  convicted  of  making  a  false  return.88 
And  in  construing  the  corporation  excise  tax  law  of  1909, 
it  was  held  that  the  word  "income,"  as  there  used,  meant  that 
which  has  "come  in"  or  which  has  been  already  received, 
and  that  the  net  income  so  taxable  should  be  determined  on 
a  cash  basis,  as  distinguished  from  a  revenue  basis,  and  hence 
(in  the  case  of  an  insurance  company)  did  not  include  un- 
collected  and  deferred  premiums  and  interest,  accrued  and 
due,  but  not  actually  received.89 

The  federal  income  tax  law  of  1913  makes  no  specific 
mention  of  this  point,  and  its  intention  in  regard  thereto  is 
not  easy  to  discern.  Yet  it  is  a  significant  fact  that,  in 
enumerating  the  deductions  which  the  taxpayer  is  allowed  to 

87  United  States  v.  Schillinger,  14  Blatchf.  71,  Fed.  Gas.  No.  16,228. 
ss  United  States  v.  Frost,  9  Int.  Rev.  Rec.  41,  Fed.  Cas.  No.  15,172. 
s  a  Mutual  Benefit  Life  Ins.  Co.  v.  Herold,  198  Fed.  199. 

(109) 


§  48  INCOME   TAXATION  (Ch.  5 

make  from  his  return  of  income  for  taxation,  aside  from 
business  losses,  bad  debts,  and  depreciation  of  property,  only 
those  items  are  included  which  represent  an  outlay  in  cash, 
such  as  "interest  paid  within  the  year,"  "necessary  expenses 
actually  paid,"  and  "taxes  paid."  Hence  it  may  be  argued 
that  if  Congress  did  not  allow  the  deduction  of  items  falling 
due  within  the  year  but  not  actually  paid,  it  would  not  be 
equitable  to  require  the  taxpayer  to  include  in  his  income  in- 
terest and  other  items  accrued  and  due  within  the  year, 
though  not  actually  collected.  This  same  argument  (as  re- 
gards the  propriety  of  looking  to  the  one  part  of  the  statute 
to  ascertain  the  meaning  of  Congress  in  the  other  part)  was 
advanced  by  the  court  in  deciding  a  leading  case  under  the 
corporation  tax  law  of  1909.  Since  that  statute  allowed  as 
deductions  only  cash  outlays,  as,  "expenses  actually  paid," 
"interest  actually  paid,"  and  "sums  paid  for  taxes,"  it  was 
argued  that  "it  would  be  strange  indeed  if,  on  the  opposite 
side  of  the  account,  the  company  were  charged  with  what  it 
had  not  received  during  the  current  year."  90 

And  it  cannot  be  denied  that  it  is  shocking  to  the  common 
sense  of  business  men  to  call  that  "income"  of  the  year 
which  has  not  been  received  or  "come  in,"  but  which  has 
merely  fallen  due.  And  so  the  courts  have  ruled  in  several 
cases.  In  one,  it  was  held  that  interest  accrued  but  not 
payable,  and  interest  accrued  but  not  paid,  secured  by  mort- 
gages drawing  interest,  are  not  "surplus  profits"  of  a  cor- 
poration. "It  is  not  easy  to  comprehend,"  said  the  court, 
"how  profits  or  surplus  profits  can  consist  of  earnings  never 
yet  received.  The  term  imports  an  excess  of  receipts  over 
expenditures,  and  without  receipts  there  cannot  properly  be 
said  to  be  profits.  Money  earned  as  interest,  however  well 
secured,  or  certain  to  be  eventually  paid,  cannot,  in  fact,  be 
distributed  as  dividends  to  stockholders  and  does  not  con- 
so  Mutual  Benefit  Life  Ins.  Co.  v.  Herold,  198  Fed.  199. 
(110) 


Ch.  5)  WHAT    CONSTITUTES   TAXABLE    INCOME  §  48 

stitute  surplus  profits  within  the  meaning  of  the  statute."  91 
In  another  case,  it  was  held  that  a  tax  directed  to  be  levied 
and  collected  for  and  during  a  certain  year  on  the  amount  of 
all  interest  or  coupons  paid  on  the  bonds  of  certain  corpora- 
tions, "whenever  and  wherever  the  same  shall  be  payable,"  did 
not  cover  interest  earned  during  the  year,  but  payable  after- 
wards.92 And  in  a  third  decision  we  find  the  court  saying: 
"It  seems  almost  to  border  upon  absurdity  to  speak  of  in- 
come as  including  that  which  has  not  been  received,  and 
which  in  the  ordinary  uncertainties  of  business  may  never 
be  received.  How  can  it  be  affirmed  of  unpaid  interest  that 
it  will  ever  be  paid,  or,  if  so,  when?  The  same  is  true  of  un- 
collected  and  deferred  premiums.  It  is  manifestly  impos- 
sible to  tell  when,  if  ever,  they  will  be  paid.  They  are  nei- 
ther receipts  nor  income  until  paid."  98 

Turning  to  the  statutes  of  the  various  states,  we  find  that 
the  Wisconsin  income  tax  law  does  not  mention  this  specific 
point,  but  that  it  lays  the  tax  on  "income  received,"  and 
makes  the  term  "income"  include  "interest  derived  from 
money  loaned  or  invested  in  bonds,  mortgages,  or  other  evi- 
dences of  debt  of  any  kind  whatsoever."  And  the  statute  of 
South  Carolina  contains  substantially  the  same  language. 
Under  these  laws,  it  seems  a  fair  inference  that  there  was 
no  intention  to  tax  uncollected  interest,  since  it  could  not  be 
described  as  "income  received."  The  statute  of  Virginia  is 
most  ambiguous  on  this  point,  inasmuch  as  it  professes  to 
tax  "income  in  excess  of  one  thousand  dollars,  whether  re- 
ceived or  due  but  not  received,  within  the  year,"  but  at  the 
same  time  makes  the  term  "income"  include  "interest  upon 
bonds,  notes,  or  other  evidences  of  debt  collected  or  received 
during  the  year." 

»i  People  v.  San  Francisco  Sav.  Union,  72  Cal.  199,  13  Pac.  498. 
»2  United  States  v.  Indianapolis  &  St  L.  R.  Co.,  113  U.  S.  711,  5 
Sup.  Ct.  716,  28  L,.  Ed.  1140. 

ss  Mutual  Benefit  Life  Ins.  Co.  v.  Herold,  198  Fed.  199. 

(Ill) 


§  49  INCOME   TAXATION  (Ch.  5 

§  49.     Profit  to  Accrue  on  Uncompleted  Contracts 

In  construing  the  corporation  tax  law  of  1909,  which  laid 
a  tax  measured  by  the  "entire  net  income  received  from  all 
sources,"  the  officers  of  the  treasury  department  ruled  that 
"net  income  on  uncompleted  contracts  may  be  estimated 
on  the  basis  of  the  percentage  of  the  work  completed  as 
compared  with  the  contract  price  of  the  whole  work."  94 
But  this  ruling  is  believed  to  be  wholly  indefensible.  First, 
because  it  fails  to  distinguish  between  earnings  and  income. 
The  price  to  be  paid  for  work  done  under  a  contract  may  be 
considered  to  have  been  earned  when  the  work  is  completed, 
and  it  may  be  said  to  have  been  earned  pro  tanto  as  the 
work  progresses.  But  in  neither  case  can  it  be  described 
as  "income"  until  it  has  been  actually  paid  over  and  received. 
That  term  does  not  mean  the  right  to  receive,  or  the  ex- 
pectation of  receiving,  a  payment  in  the  future.  Secondly, 
no  contractor  can  be  absolutely  certain  of  receiving  the  price 
when  the  work  is  done.  His  expectation  of  so  doing  may  be 
more  or  less  confident  according  to  the  circumstances,  but 
even  at  the  best  he  cannot  be  sure  that  he  will  not  have  to 
reckon  with  claims  for  offsets  or  deductions.  And  it  would 
seem  clear  that  money  which  may  or  may  not  be  paid  in  the 
future,  and,  if  paid,  may  be  greater  or  less  in  amount,  is  in 
no  sense  income.  Further,  the  ruling  in  question  would 
be  entirely  inapplicable  to  those  contracts  which  involve  per- 
sonal skill,  personal  confidence,  professional  services,  or  the 
like,  where  the  stipulated  compensation  is  not  apportionable. 

§  50.     Profits  from  Sale  or  Lease  of  Patent  Rights 

The  Commissioner  of  Internal  Revenue  ruled,  under  the 
corporation  tax  law  of  1909,  that  receipts  from  the  sale  of 
patent  rights  are  to  be  included  in  taxable  income,  and  also 
that  royalties  received  on  patent  rights  (presumably  either 
on  the  sale  or  lease  of  such  rights  or  on  the  use  of  the  pat- 
si  Treasury  Decisions,  No.  1742,  par.  88. 
(112) 


Ch.  5)  WHAT    CONSTITUTES   TAXABLE    INCOME  §  51 

ented  article)  are  also  to  be  reckoned  and  reported  as  in- 
come, though  an  allowance  would  be  made  for  depreciation 
of  patents  expiring  during  the  year.96  And  the  Wisconsin 
income  tax  law  makes  the  term  "income"  include  "all  royal- 
ties derived  from  the  possession  or  use  of  franchises  or 
legalized  privileges  of  any  kind,"  which  is  construed  by  the 
tax  commission  of  that  state  as  including  royalties  received 
from  patents.  As  to  royalties  on  sale  or  lease  the  case  is 
clear,  but  not  so  as  to  receipts  from  the  sale  of  patents  or 
patent  rights.  One  who  buys  a  patent  or  rights  under  a 
patent,  and  then  sells  it  at  an  advanced  price,  may  be  said  to 
have  made  a  "profit"  which  should  be  taxable  as  a  part  of  his 
income.  But  where  the  patentee  sells  (for  example)  his 
rights  under  the  patent  in  foreign  countries,  it  would  rather 
seem  to  be  a  conversion  of  capital  assets  into  the  form  of 
money  than  the  receipt  of  income. 

§  51.    Annuities 

The  revenue  law  in  Massachusetts  provides  that  "personal 
estate,  for  the  purpose  of  taxation,  shall  include  *  *  *  the 
income  from  an  annuity."  9<J  And  the  act  of  Congress  of  1913 
provides  that  "all  persons,  firms,  copartnerships,  companies, 
corporations,  *  *  *  and  insurance  companies,  *  *  * 
having  the  control,  receipt,  custody,  disposal,  or  payment,  di- 
rectly or  indirectly,  of  *  *  *  annuities  *  *  *  or  other 
fixed  or  determinable  annual  gains,  profits,  and  income  of  an- 
other person,"  exceeding  the  statutory  minimum,  shall  not 
only  make  the  necessary  return  thereof,  but  also  deduct  and 
withhold  the  income  tax  and  pay  it  over  to  the  United  States. 
From  this  it  may  plainly  be  seen  that,  at  least  under  the  two 
statutes  mentioned,  an  annuity  is  regarded  and  treated  as 
taxable  income,  whether  it  be  created  by  grant,  by  testamen- 
tary trust,  or  by  the  contract  of  an  insurance  company. 

»5  Treasury  Decisions,  No.  1742,  pars.  46  and  61. 

»e  Rev.  Laws  Mass.  1902,  p.  206;    Gen.  Stat.  Mass.  c.  11,  §  4. 

BL.INC.TAX.— 8  (113) 


§  52  INCOME   TAXATION  (Ch.  5 

§  52.    Interest  on  Government  Bonds 

The  federal  statute  now  in  force  provides  that,  in  computing 
the  net  income  of  a  taxpayer,  for  the  purpose  of  the  income 
tax,  there  shall  be  excluded  "interest  upon  the  obligations  of 
the  United  States  or  its  possessions."  In  former  statutes  of 
the  same  kind  Congress  did  not  hesitate  to  include  the  obliga- 
tions of  the  federal  government.  In  the  act  of  1861,  the  tax 
was  imposed,  among  other  things,  upon  "interest  upon  treasury 
notes  or  other  securities  of  the  United  States."  The  act  of 
1862  taxed  "interest  upon  notes,  bonds,  or  other  securities  of 
the  United  States,"  as  did  also  the  act  of  1864  and  that  of 
1870.  In  the  act  of  1894,  the  provision  was  that  "there  shall 
be  included  all  income  derived  from  interest  upon  notes,  bonds', 
and  other  securities,  except  such  bonds  of  the  United  States 
the  principal  and  interest  of  which  are  by  the  law  of  their 
issuance  exempt  from  all  federal  taxation."  Under  the  cor- 
poration excise  tax  law  of  1909,  it  was  ruled  that  interest  on 
United  States  bonds  must  be  included  in  estimating  the  net 
income  of  corporations,  because  this  statute  imposed  a  tax, 
not  on  the  property  of  the  corporation  nor  directly  upon  its 
income,  but  upon  the  privilege  of  carrying  on  business  in  a 
corporate  capacity,  the  net  income  being  used  only  as  a  meas- 
ure of  the  tax  in  each  particular  case.97 

It  is  not  competent  for  the  several  states  to  tax  income 
derived  from  the  bonds  or  other  obligations  of  the  federal 
government.  This  limitation  might  be  inferred  from  general 
principles  of  constitutional  law.98  But  it  is  also  expressly 
provided  by  act  of  Congress  that  "all  stocks,  bonds,  treasury 
notes,  and  other  obligations  of  the  United  States  shall  be 
exempt  from  taxation  by  or  under  state  or  municipal  or  local 
authority."  99  Some  of  the  states  having  income  tax  laws 
expressly  recognize  this  restriction.  Thus,  in  Wisconsin,  the 

»7  28  Op.  Att.  Gen.  138;   Treasury  Decisions,  No.  1742,  par.  37. 

98  See,  supra,  §  17. 

99  Rev.  Stat.  U.  S.,  §  3701,  U.  S.  Comp.  St.  1901,  p.  24SO. 

(114) 


Ch.  5)  WHAT   CONSTITUTES    TAXABLE   INCOME  §  53 

taxpayer  is  allowed  to  deduct  from  his  income  as  returned 
for  taxation  "interest  received  from  bonds  or  other  securities 
exempt  from  taxation  under  the  laws  of  the  United  States."  10° 
In  South  Carolina,  the  provision  is  that,  "in  estimating  the 
gains,  profits,  and  income,  there  shall  not  be  included  interest 
upon  such  bonds  or  securities  of  this  state,  or  of  the  United 
States,  the  principal  and  interest  of  which  are,  by  the  law 
of  their  issue,  exempt  from  taxation.",101  In  two  other 
states,  the  law  purports  on  its  face  specifically  to  tax  income 
derived  from  United  States  bonds.  But  to  that  extent,  these 
statutes  must  necessarily  be  held  invalid  in  any  case  in  which 
the  attempt  was  made  to  enforce  such  a  provision.  The  states 
intended  are  Virginia  and  Tennessee.  In  the  former,  the 
law  provides  that  "income  shall  include  *  *  *  interest 
upon  notes,  bonds,  or  other  evidences  of  debt,  of  whatever 
description,  of  the  United  States  or  any  other  state  or  coun- 
try." 102  In  Tennessee,  the  statute  reads :  "The  amount  of 
income  derived  from  United  States  bonds,  and  all  other  stocks 
and  bonds  not  taxed  ad  valorem,  shall  be  taxable"  at  the  rate 
of  five  per  centum.103 

§  53.     Dividends  on  Corporate  Stock 

Whatever  the  taxpayer  may  actually  receive  from  a  corpo- 
ration, by  way  of  dividends  on  the  shares  of  its  stock  which 
he  owns,  constitutes  a  part  of  his  income  and  will  be  taxable 
as  such.10*  This  rule,  however,  is  subject  to  two  limitations. 
First,  a  "dividend,"  properly  so  called,  is  a  distribution  to 
stockholders  of  the  whole  or  a  part  of  the  current  earnings 
or  profits  of  the  corporation,  and  not  a  distribution  of  capital 
assets.  When  a  portion  of  the  capital  is  thus  returned  to 
stockholders,  it  is  not  income,  from  their  point  of  view,  but  a 

100  Wisconsin  Income  Tax  Law  1911,  §  1087m,  4,  e. 

101  Civ.  Code  S.  Car.  1902,  §  325. 

102  Acts  Va.  1908,  c.  10,  p.  20,  §  10. 

103  Code  Tenn.,  §§  690,  710. 

104  Magee  v.  Denton,  5  Blatchf.  130,  Fed.  Gas.  No.  8,943. 

(115) 


§  53  INCOME   TAXATION  ( Ch.  5 

replacement  of  capital,  except  in  the  few  exceptional  cases 
where  it  is  permissible  for  a  corporation  to  divide  current 
receipts  among  the  stockholders,  although  the  property  in 
which  the  capital  is  invested  is  correspondingly  depleted,  as  in 
the  case  of  mining  and  quarry  companies  and  some  others.105 
Secondly,  where  a  statute  taxing  incomes  lays  its  burden 
upon  both  individuals  and  corporations,  it  is  usual  to  provide 
that  the  individual  taxpayer  may  deduct  from  his  return  of 
income  for  taxation  the  amount  of  any  dividends  received  by 
him  from  corporations  which  are  subject  to  the  tax,  or  which 
have  been  assessed  for  the  tax  or  have  paid  it.  This  is  a 
just  provision,  introduced  for  the  purpose  of  avoiding  the 
double  taxation  which  would  result  if  the  corporation  were 
taxed  on  its  profits  and  the  stockholders  on  the  same  profits 
when  divided  among  them. 

Subject  to  these  provisions,  the  income  tax  laws  quite  com- 
monly enumerate  "dividends"  among  the  specific  sources  of 
taxable  income.  But  on  general  principles  of  law,  and  even 
when  not  so  declared  in  the  tax  statute,  revenue  of  this  kind 
is  always  classed  as  "income."  And  it  is  immaterial  whether 
a  corporate  dividend  is  declared  and  paid  as  a  regular  dividend 
(that  is,  regular  in  respect  either  to  its  periodicity  or  its 
amount)  or  as  an  extra  dividend  or  a  bonus  in  cash.108  Thus, 
where  a  testator  bequeathed  to  his  wife  for  her  life  the  "use, 
interest,  and  income"  of  his  estate,  part  of  which  consisted 
in  stock  in  an  incorporated  bank,  and  the  bank  afterwards 
reduced  its  capital,  by  returning  to  the  stockholders  one-half 
of  it  with  a  premium  of  40  per  cent  to  be  paid  out  of  the  sur- 
plus, it  was  held  that  the  word  "income"  included  the  40 
per  cent  premium  returned  to  the  testator"s  estate,  and  that 
it  passed  under  the  will  to  the  widow.107  And  the  rule  is  not 

105  Supra,  §  41.     And  see  Reed  v.  Head,  6  Allen  (Mass.)  174;   Har- 
vard College  v.  Amory,  9  Pick.  (Mass.)  446. 
loe  Lord  v.  Brooks,  52  N.  H.  72. 
lor  In  re  Warren,  2  Con.  Sur.  (N.  Y.)  411,  11  N.  Y.  Supp.  787. 

(116) 


Ch.  5)  WHAT    CONSTITUTES   TAXABLE    INCOME  §  54 

restricted  to  dividends  declared  and  paid  by  corporations 
truly  so  called,  but  extends  also  to  any  distribution  of  profits 
among  the  members  of  an  unincorporated  society,  syndicate, 
pool,  trust,  or  other  joint  enterprise.  For  instance,  where 
an  investment  is  made  in  an  unincorporated  association  or- 
ganized to  deal  in  land  as  a  commodity,  and  profits  are  realized 
from  the  business,  which  are  divided  among  the  members, 
with  no  impairment  of  the  principal,  such  profits  are  per- 
sonalty, representing  income,  and  go  to  the  life  tenant  under 
the  will  of  one  of  the  members.108  And  it  has  been  ruled 
that,  when  a  dividend  has  been  declared  and  is  immediately 
payable,  so  that  the  stockholder  can  have  it  on  demand,  it  is 
to  be  reckoned  as  a  part  of  his  income  for  the  year,  though 
it  has  not  actually  come  into  his  hands  as  yet  in  the  form 
of  cash.  It  was  said :  "If  the  plaintiff's  counsel  is  correct  in 
his  position  that  the  profits  of  an  incorporated  company,  it- 
self an  artificial  person,  are  not,  in  the  contemplation  of  the 
act  of  Congress,  a  portion  of  the  gains,  profits,  or  income  of 
the  stockholders,  until  they  are  distributed  as  dividends,  or 
embraced  in  a  dividend  declared  by  the  managers  of  the  cor- 
poration, I  think  it  quite  clear  that,  when  a  dividend  has  been 
declared  and  has  become  payable,  the  mere  omission  of  the 
stockholder  to  receive  or  obtain  the  dividend  subject  to  his 
call  would  not  excuse  him  from  embracing  the  amount  of 
such  dividend  in  his  statement  of  his  taxable  income  for  the 
year."  109 

§  54.     Same;    Stock  Dividends 

It  is  a  debatable  and  unsettled  question  whether  a  dividend 
declared  by  a  corporation,  but  not  payable  in  cash  but  in  the 
form  of  new  stock  distributable  among  the  present  stock- 
holders proportionally,  the  nominal  capital  being  correspond- 
ingly increased,  is  to  be  accounted  "income"  or  "capital"  in  the 


IDS  in  re  Thomson's  Estate,  153  Pa.  St  333,  26  Atl.  652. 
109  Magee  v.  Denton,  5  Blatchf.  130,  Fed.  Cas.  No.  8,943. 


(117) 


§  54  INCOME   TAXATION  (Ch.  5 

hands  of  the  stockholder.  And  this  is  immediately  pertinent 
to  the  subject  in  hand,  because  if  the  stockholder  receives 
such  a  dividend  as  an  accretion  to  his  capital,  it  is  not  sub- 
ject to  the  income  tax,  while,  on  the  other  hand,  if  it  is  income, 
he  should  include  it  in  his  return,  and  probably  at  its  market 
value.  Probably  it  may  be  stated  that  the  rule  as  stated  by  the 
Court  of  Appeals  of  New  York  is  sustained  by  a  majority 
of  the  decisions.  It  is  this :  Where  a  dividend  is  declared 
by  a  corporation  on  its  capital  stock,  payable  in  new  stock 
certificates  based  on  accumulated  but  undivided  profits,  it  is 
received  as  "income"  by  the  stockholders,  and  not  as  capital, 
since  the  substance  and  intent  of  such  a  transaction  is  the  dis- 
tribution of  earnings,  and  it  does  not  result  in  any  actual  addi- 
tion to  capital,  for  although  the  nominal  amount  of  the  cor- 
poration's capital  stock  is  thereby  increased,  yet  the  corpora- 
tion actually  has  neither  more  property  nor  more  capital.110 
But  in  Massachusetts  and  some  other  states,  a  contrary  rule 
prevails.111  In  Maryland,  the  court  has  ruled  that,  in  deter- 
mining whether  a  stock  dividend  declared  on  stock  constitut- 
ing the  corpus  of  a  trust  estate  is  a  part  of  the  corpus,  so 
as  to  pass  to  the  remainderman,  or  income  available  for  the 
life  beneficiary,  the  court  is  not  governed  by  the  form  in  which 
the  dividend  has  been  declared,  but  the  character  of  the  fund 
out  of  which  the  dividend  is  paid  controls;  and  where  the 
dividend  represents  earnings,  the  dividend  is  income,  while  if 
it  is  an  appropriation  of  capital,  it  is  a  part  of  the  corpus.112 

noLowry  v.  Farmers'  Loan  &  Trust  Co.,  172  N.  Y.  137,  64  N.  E. 
796.  And  see  Soehlein  v.  Soehlein  (Wis.)  131  N.  W.  739;  Earp's  Ap- 
peal, 28  Pa.  St.  368;  Hite's  Devisees  v.  Kite's  Ex'r,  93  Ky.  257,  20  S. 
W.  778;  Pritchett  v.  Nashville  Trust  Co.,  96  Tenn.  472,  36  S.  W.  1064, 
33  L.  R.  A.  856;  Moss'  Appeal,  83  Pa.  St.  264. 

in  Minot  v.  Paine,  99  Mass.  101,  96  Am.  Dec.  705;  Parker  v.  Ma- 
son, 8  R.  I.  427;  Chester  v.  Buffalo  Car  Mfg.  Co.,  70  App.  Div.  443, 
75  N.  Y.  Supp.  428. 

112  Ex  parte  Humbird  (Md.)  80  Atl.  209. 

(118) 


Ch.  5)  WHAT    CONSTITUTES   TAXABLE    INCOME  §  55 

§  55.     Accumulated  Earnings  or  Undivided  Profits  of  Cor- 
porations 

These  are  taxable  under  the  act  of  Congress  of  1913,  as 
income  of  the  stockholder,  but  only  in  cases  where  the  tax- 
able income,  including  such  items,  is  large  enough  to  be 
subject  to  the  super-tax  or  additional  tax,  and  only  in  cases 
where  the  device  of  a  corporation,  accumulating  its  profits 
instead  of  dividing  them,  is  resorted  to  for  the  purpose  of 
evading  the  tax.  The  provision  is  that  "for  the  purpose  of 
this  additional  tax,  the  taxable  income  of  any  individual  shall 
embrace  the  share  to  which  he  would  be  entitled  of  the  gains 
and  profits,  if  divided  or  distributed,  whether  divided  or 
distributed  or  not,  of  all  corporations,  joint  stock  compan- 
ies, or  corporations  however  created  or  organized,  formed  or 
fraudulently  availed  of  for  the  purpose  of  preventing  the  im- 
position of  such  tax  through  the  medium  of  permitting 
such  gains  and  profits  to  accumulate  instead  of  being  divided 
or  distributed ;  and  the  fact  that  any  such  corporation,  joint 
stock  company,  or  association  is  a  mere  holding  company, 
or  that  the  gains  and  profits  are  permitted  to  accumulate  be- 
yond the  reasonable  needs  of  the  business  shall  be  prima 
facie  evidence  of  a  fraudulent  purpose  to  escape  such  tax ; 
but  the  fact  that  the  gains  and  profits  are  in  any  case  per- 
mitted to  accumulate  and  become  surplus  shall  not  be  con- 
strued as  evidence  of  a  purpose  to  escape  the  said  tax  in 
such  cases  unless  the  Secretary  of  the  Treasury  shall  certify 
that  in  his  opinion  such  accumulation  is  unreasonable  for 
the  purposes  of  the  business.  When  requested  by  the  Com- 
missioner of  Internal  Revenue,  or  any  district  collector  of 
internal  revenue,  such  corporation,  joint  stock  company, 
or  association  shall  forward  to  him  a  correct  statement  of 
such  profits  and  the  names  of  the  individuals  who  would  be 
entitled  to  the  same  if  distributed."  From  the  fact  that  this 
applies  only  "for  the  purpose  of  the  additional  tax"  it  may 
be  inferred  that  Congress  did  not  regard  a  stockholder's  in- 

(119) 


§  55  INCOME   TAXATION  (Ch.  5 

terest  in  the  undivided  earnings  or  surplus  of  the  corporation 
as  taxable  income  in  ordinary  cases  or  under  ordinary  con- 
ditions. But  the  attempt  has  sometimes  been  made,  under 
other  statutes,  to  tax  such  interest  as  income.  Thus,  the 
United  States  income  tax  law  of  1870  provided  that,  "in 
estimating  the  gains,  profits,  and  income  of  any  person, 
there  shall  be  included  *  *  *  the  share  of  any  person 
of  the  gains  and  profits,  whether  divided  or  not,  of  all  com- 
panies or  partnerships."  And  there  is  a  Canadian  decision 
to  the  effect  that  the  undivided  profits  of  a  corporation,  or 
a  portion  of  its  profits  derived  from  the  employment  of  capi- 
tal and  annually  carried  into  a  reserve  fund,  may  be  "in- 
come" for  the  purposes  of  a  testamentary  trust,  by  which 
it  was  provided  that  the  trustee  might  make  advances  to 
the  beneficiaries  "out  of  income."  113  But  this  is  contrary 
to  all  the  weight  of  authority.114  In  several  of  the  cases  on 
the  subject,  it  is  said  that  the  word  "income"  is  not  broad 
enough  to  include  things  not  separated  in  some  way  from 
the  principal.  It  is  not  synonymous  with  "increase."  The 
value  of  corporate  stock  may  be  increased  by  good  manage- 
ment, prospects  of  business,  and  the  like,  but  such  increase 
is  not  income.  It  may  also  be  increased  by  the  accumulation 
of  a  surplus  fund.  But  so  long  as  that  surplus  is  retained 
by  the  corporation,  either  as  a  surplus  or  as  increased  stock, 
it  can  in  no  proper  sense  be  called  income.  It  may  become 
income-producing,  but  it  is  not  income.115  Thus,  where  the 
profits  of  a  manufacturing  or  banking  corporation  have  been 
accumulating  for  many  years,  until  the  market  value  of  the 
stock  is  more  than  double  its  original  price,  and  the  owner 
dies,  directing  the  "income"  of  his  estate  to  be  applied  to 

us  Worts  v.  Worts,  18  Ontario,  332. 

in  Lauman  v.  Foster  (Iowa)  135  N.  W.  14;  Tubb  v.  Fowler  (Term.) 
99  S.  W.  988. 

us  Spooner  v.  Phillips,  62  Conn.  62,  24  Atl.  524,  16  L.  R.  A.  461; 
Mills  v.  Britton,  64  Conn.  4,  29  Atl.  231,  24  L.  R.  A.  536;  Smith  v. 
Hooper,  95  Md.  16,  51  Atl.  844. 

(120) 


Ch.  5)  WHAT   CONSTITUTES    TAXABLE    INCOME  §  55 

particular  objects,  these  extraordinary  accumulations  are  as 
much  a  part  of  his  capital  as  any  other  portion  of  his  es- 
tate, and  must  therefore  be  regarded,  not  as  income,  but  as 
part  of  the  principal  from  which  the  future  income  is  to 
arise.116  This  subject  has  been  fully  and  conclusively  dis- 
cussed by  the  United  States  Supreme  Court  in  the  follow- 
ing terms :  "Money  earned  by  a  corporation  remains  the 
property  of  the  corporation,  and  does  not  become  the  prop- 
erty of  the  stockholders,  unless  and  until  it  is  distributed 
among  them  by  the  corporation.  The  corporation  may 
treat  it  and  deal  with  it  either  as  profits  of  its  business  or  as 
an  addition  to  its  capital.  Acting  in  good  faith  and  for 
the  best  interests  of  all  concerned,  the  corporation  may  dis- 
tribute its  earnings  at  once  to  the  stockholders  as  income ; 
or  it  may  reserve  a  part  of  the  earnings  of  a  prosperous 
year  to  make  up  for  a  possible  lack  of  profits  in  future  years ; 
or  it  may  retain  portions  of  its  earnings,  and  allow  them 
to  accumulate,  and  then  invest  them  in  its  own  works  and 
plant,  so  as  to  secure  and  increase  the  permanent  value  of 
its  property.  Which  of  these  courses  shall  be  pursued  is  to 
be  determined  by  the  directors,  with  due  regard  to  the  con- 
dition of  the  company's  property  as  a  whole;  and,  unless  in 
case  of  fraud  or  bad  faith  on  their  part,  their  discretion  in 
this  respect  cannot  be  controlled  by  the  courts,  even  at  the 
suit  of  owners  of  preferred  stock,  entitled  by  express  agree- 
ment with  the  corporation ,  to  dividends  at  a  certain  yearly 
rate  in  preference  to  the  payment  of  any  dividend  on  the 
common  stock,  but  dependent  on  the  profits  of  each  particu- 
lar year,  as  declared  by  the  board  of  directors.  Reserved 
and  accumulated  earnings,  so  long  as  they  are  held  and  in- 
vested by  the  corporation,  being  part  of  its  corporate  prop- 
erty, it  follows  that  the  interest  therein,  represented  by  each 
share,  is  capital,  and  not  income  of  that  share,  as  between 

us  Earp's  Appeal,  28  Pa.  St.  368. 

(121) 


§  55  INCOME   TAXATION  (Gh.  5 

the  tenant  for   life  and  remainderman,   legal   or   equitable 
thereof."  11T 

But  it  is  not  only  on  general  principles  of  law  that  this 
result  is  reached,  but  decisions  to  the  same  effect  have  been 
made  under  the  earlier  income  tax  laws.  It  was  held  that 
undivided  earnings  of  a  corporation  are  not  taxable  as  in- 
come of  the  stockholders.118  And  the  Supreme  Court,  con- 
struing the  provisions  of  the  income  tax  act  of  1870,  laying 
a  tax  on  all  undivided  profits  of  corporations  accrued  and 
earned  and  added  to  a  surplus,  contingent,  or  other  fund, 
held  'it  to  be  plain  that  it  was  the  intention  of  Congress  not 
to  subject  to  that  tax  profits  of  a  railroad  corporation  dur- 
ing the  year,  which  were  not  divided  but  used  for  construc- 
tion.119 

§  56.  Right  to  Subscribe  for  New  Stock  of  Corporation 
It  is  a  familiar  rule  in  the  law  of  corporations  that  when 
a  company  issues  new  stock  (or  stock  previously  held  in  re- 
serve in  the  treasury),  it  must  first  be  allotted  to  the  ex- 
isting stockholders,  each  being  entitled  to  take  his  propor- 
tionate share  at  a  price  fixed.  This  price  is  usually  and 
properly  the  par  value  of  the  stock,  and  if  its  market  value 
is  greater,  a  considerable  advantage  may  accrue  to  the  share- 
holder, who  may  either  take  his  new  stock  and  sell  it  at  a 
premium  or  sell  his  right  of  subscription  for  it,  and  indeed 
the  sale  of  these  "rights"  is  a  common  occurrence  on  the 
stock  exchanges.  The  courts  all  hold  that  the  gain  realized 
by  a  stockholder,  either  from  a  sale  of  the  privilege  or  from 
its  exercise  and  the  subsequent  sale  of  the  stock  at  a  profit, 
is  capital  or  principal  in  his  hands  and  not  a  part  of  his  in- 

H7  Gibbons  v.  Mahon,  136  U.  S.  549,  10  Sup.  Ct.  1057,  34  L.  Ed. 
525. 

us  Ex  parte  Ives,  Fed.  Gas.  No.  7,114. 

ii»  Marquette,  H.  &  O.  R.  Co.  v.  United  States,  123  U.  S.  722,  8 
Sup.  Ct.  319,  31  L.  Ed.  302. 

(122) 


Ch.  5)  WHAT    CONSTITUTES    TAXABLE    INCOME  §  57 

come.120  Thus,  in  a  case  in  Pennsylvania,  it  appeared  that 
a  testator  held  stock  in  the  B.  railroad  company,  which,  in 
order  to  extend  its  line,  organized  another  company,  with 
sufficient  capital  stock  to  build  it,  and  the  unbuilt  line  was 
mortgaged  for  a  sum  sufficient  to  build  it,  and  the  B.  com- 
pany issued  bonds  for  the  amount  secured  by  the  mortgage, 
and  such  bonds  the  stockholders  of  the  B.  company  were 
permitted  to  take  at  par,  in  proportion  to  their  holdings, 
and  the  capital  stock  of  the  new  company  was  thrown  in  as 
a  bonus  to  those  who  subscribed  for  the  bonds.  It  was  held 
that  the  premium  at  which  the  option  to  subscribe  to  the 
stock  of  the  new  company  was  sold  was  principal,  and  not 
income  from  stock  of  the  B.  company.121  But  under  the  in- 
come tax  laws  it  might  be  argued  that  the  premium  ob- 
tained by  the  sale  of  a  stockholder's  subscription  rights, 
though  it  is  not  income,  may  be  described  as  "gain"  or 
"profit,"  and  so  be  taxable,  especially  where  the  statute, 
like  the  act  of  Congress  now  in  force,  taxes  gains  and  profits 
arising  from  the  sale  of  or  dealing  in  personal  property. 
But  in  the  absence  of  any  decision  on  this  point,  the  opinion 
may  be  hazarded  that  such  a  transaction  is  not  within  the 
spirit  or  the  equity  of  a  statute  purporting  to  tax  "incomes" 
as  its  principal  feature,  though  it  might  come  within  the  lit- 
eral meaning  of  the  language  employed. 

§  57.     Sale  and  Distribution  of  Assets  of  Corporation 

A  distribution  among  stockholders  of  the  assets  of  a  cor- 
poration, upon  its  dissolution  or  preparatory  to  dissolution, 
is  a  return  of  capital,  at  least  to  the  extent  of  the  original  in- 

120  Lauman  v.  Foster  (Iowa)  135  N.  W.  14;    Brinley  v.  Grou,  50 
Conn.' 66,  47  Am.  Rep.  618;  Moss'  Appeal,  83  Pa.  St.  264,  24  Am.  Rep. 
164;  Biddle's  Appeal,  99  Pa.  St  278;  In  re  Thomson's  Estate,  153  Pa. 
St.  333,  26  Atl.  652.    But  compare  Wiltbank's  Appeal,  64  Pa.  St.  256, 
3  Am.  Rep.  585. 

121  In  re  Thomson's  Estate,  153  Pa.  SL  333,  26  Atl.  652. 

(123) 


§  57  INCOME    TAXATION  (Ch.  5 

vestment,  and  not  in  any  sense  income  in  their  hands.122 
Thus,  a  fund  resulting  from  sales  of  materials,  manufac- 
tured articles,  products  from  the  land,  or  the  general  per- 
sonal property  of  a  corporation,  all  indicating  a  final  wind- 
ing up  of  its  business,  cannot  be  called  income  of  the  stock- 
holders when  apportioned  among  them.123  And  where  a 
corporation  sells  part  of  its  original  franchise  and  property, 
and  distributes  the  proceeds  of  the  same  as  a  dividend  among 
its  stockholders,  such  dividend  is  to  be  regarded,  as  between 
a  life  tenant  and  remainderman  of  part  of  the  stock,  as  capi- 
tal and  not  as  income.12* 

122  in  re  Thomson's  Estate,  153  Pa.  St.  333,  26  Atl.  652. 
128  Gehr  v.  Mont  Alto  Iron  Co.,  174  Pa.  St.  430,  34  Atl.  638. 
124  Vinton's  Appeal,  99  Pa.  St.  434,  44  Am.  Rep.  116. 

(124) 


Ch.  6)      PERSONS   AND   CORPORATIONS  SUBJECT  TO   TAX      §  58 

CHAPTER  VI 
PERSONS  AND  CORPORATIONS  SUBJECT  TO  TAX 

§  58.  Residents. 

59.  Residents  Deriving  Income  from  Abroad. 

60.  Domestic  Corporations  with  Foreign  Branches  or  Agencies. 

61.  Non-Residents  and  Aliens. 

62.  Carrying  on  of  Business  or  Trade. 

63.  Carrying  on  Several  Lines  of  Business. 

64.  Salaried  Officers. 

65.  Bankrupt  and  Insolvent  Persons  and  Companies. 

66.  Estates  of  Decedents  and  Dissolved  Corporations. 

67.  Partnerships. 

68.  Limited  Partnerships. 

69.  Corporations. 

70.  Public  Service  Corporations. 

71.  Unincorporated  Associations. 

72.  Incorporated  Clubs. 

73.  Inactive  Corporations  and  Holding  Companies. 

74.  Corporations  of  Philippines  and  Porto  Rico. 

75.  Insurance  Companies. 

§  58.     Residents 

Every  person  residing  within  the  United  States,  whether 
he  is  an  American  citizen  or  an  alien,  is  subject  to  the  fed- 
eral income  tax.  And  in  the  states  where  similar  tax  laws 
are  in  force,  they  are  generally  made  applicable  to  "residents" 
of  the  state,  without  regard  to  whether  such  persons  are  citi- 
zens of  the  United  States  or  of  the  taxing  state,  although 
in  South  Carolina  the  statute  refers  to  "every  citizen  of  this 
state."  Disputed  questions  chiefly  arise  in  the  case  of  per- 
sons who  maintain  homes  in  two  or  more  states  (or  in  the 
United  States  and  also  abroad)  or  who  spend  a  large  part 
of  their  time  in  travelling.  In  such  cases,  the  test  of  "resi- 
dence" will  be  the  location  of  that  establishment  which  the 
person  regards  as  his  home,  and  to  which  he  has  the  inten- 
tion of  returning  whenever  absent,  however  protracted  may 

(125) 


§58  INCOME   TAXATION  (Ch.  6 

be  his  absence.  Or,  according  to  the  circumstances,  it  will 
be  determined  by  the  proportion  between  the  time  which  the 
person  spends  within  the  given  jurisdiction  and  that  which 
he  spends  elsewhere,  "residence"  implying  a  more  or  less  fixed 
and  permanent  abode,  as  distinguished  from  a  temporary  so- 
journ for  business  or  other  purposes. 

These  rules,  as  specially  applicable  to  matters  of  taxation, 
may  be  illustrated  by  the  following  cases :  In  a  late  case  in 
Iowa,  it  was  held  that  one  who,  after  living  continuously  for 
many  years  in  the  same  house,  starts  on  a  tour  of  the  world, 
leaving  the  house  in  charge  of  a  care-taker,  remains  a  "resi- 
dent" of  the  state  and  city  where  his  house  is,  for  purposes 
of  taxation,  during  his  absence  from  the  country,  even  though 
he  may  intend,  on  his  return,  to  remove  to  another  state.1  In 
England  it  is  held  that  a  master  mariner,  trading  between 
an  English  port  and  various  foreign  ports,  who  maintains 
a  home  for  his  family  in  the  English  port,  is  liable  for  the 
income  tax  on  his  salary,  notwithstanding  the  fact  that  he  is 
abroad  for  much  the  greater  part  of  the  year,  and  that  most 
of  his  salary  is  earned  on  the  high  seas  and  not  in  England.2 
In  another  English  case  it  appeared  that  an  American  citizen 
had  for  the  last  twenty  years  lived  on  board  his  own  yacht, 
which  was  anchored  in  tidal  navigable  waters  in  England, 
obtaining  his  provisions  and  necessaries  from  the  nearest 
village.  The  yacht  had  always  been  kept  fully  manned  and 
ready  to  go  to  sea  at  any  moment.  It  was  held  that  the 
owner  was  a  person  "residing  in  the  United  Kingdom"  within 
the  income  tax  act,  and  was  assessable  accordingly.3  A  sim- 
ilar decision  was  made  in  the  case  of  an  American  citizen, 
having  no  place  of  business  in  Great  Britain,  but  who  rented 
a  house  and  shooting  rights  in  Scotland,  where  he  spent  about 

1  Barhydt  v.  Cross  (Iowa)  136  N.  W.  525. 

2  In  re  Young,  12  Scotch  Law  Rep.  602,  1  Tax  Cas.  57 ;   Rogers  v. 
Inland  Revenue,  16  Scotch  Law  Rep.  682,  1  Tax  Cas.  225. 

a  Brown  v.  Burt,  81  Law  J.  K.  B.  17. 

(126) 


Ch.  6)    PERSONS  AND  CORPORATIONS  SUBJECT  TO  TAX    §  59 

two  months  continuously  in  each  year,  accompanied  by  his 
valet,  as  he  had  no  family.  His  house  in  New  York  was  al- 
ways kept  in  readiness  for  his  return,  but  so  was  the  house 
in  Scotland,  which  was  kept  furnished  and  ready  for  his 
occupation  at  any  time.  It  was  held  that  he  was  a  person  "re- 
siding in  the  United  Kingdom"  for  the  purposes  of  the  income 
tax.4  So  also,  where  a  merchant  carried  on  business  in  Italy, 
where  he  ordinarily  resided,  but  also  owned  a  place  of  resi- 
dence in  England,  where  he  dwelt  with  his  family  for  several 
months  in  the  year,  it  was  held  that  he  was  a  resident  of  Eng- 
land, and  was  liable  to  taxation  in  respect  to  the  profits  of  the 
business  carried  on  abroad.5 

§  59.     Residents   Deriving  Income  from  Abroad 

Under  the  act  of  Congress,  persons  residing  within  the 
United  States  are  required  to  pay  the  tax  upon  "the  entire 
net  income  received  from  all  sources,"  which  includes  for- 
eign investments  and  business  as  well  as  domestic.  This  is 
further  shawn  by  the  provision  that  the  amount  of  the  tax 
"shall  be  deducted  and  withheld  from  coupons,  checks,  or  bills 
of  exchange  for  or  in  payment  of  interest  upon  bonds  of  for- 
eign countries  and  upon  foreign  mortgages  or  like  obligations, 
not  payable  in  the  United  States,  and  also  from  coupons, 
checks,  or  bills  of  exchange  for  or  in  payment  of  any  divi- 
dends upon  the  stock  or  interest  upon  the  obligations  of  for- 
eign corporations,  associations,  and  insurance  companies  en- 
gaged in  business  in  foreign  countries."  Under  similar  pro- 
visions in  the  corporation  tax  law  of  1909,  it  was  ruled  that 
American  corporations  should  include  in  their  returns  not 
only  the  income  derived  from  the  business  carried  on  within 
the  confines  of  the  United  States,  but  income  received  from 
business  transacted  in  any  foreign  country  as  well.6  This  is 

<  Cooper  v.  Cadwalader,  5  Tax  Cas.  101. 

s  Lloyd  v.  Sulley,  21  Scotch  Law  Rep.  482,  2  Tax  Cas.  37. 

«  Treasury  Decisions,  No.  1742,  par.  9. 

(127) 


§59  INCOME   TAXATION  (Ch.  6 

also  the  law  in  England.  Thus,  a  corporation  organized  in 
that  country  and  maintaining  a  head  office  there,  where  its 
directors  meet  and  administer  its  general  affairs,  and  to  which 
its  revenues  are  remitted,  is  assessable  for  the  income  tax 
in  England,  though  all  its  profits  are  derived  from  plantations, 
mines,  or  other  enterprises  conducted  in  foreign  countries.7 
And  so,  dividends  declared  by  a  foreign  corporation  and  pay- 
able at  its  agency  in  London,  on  shares  owned  by  a  British 
citizen  and  resident,  are  taxable  as  part  of  his  income.8 

It  is  also  within  the  competence  of  the  several  states  to 
tax  their  resident  citizens  upon  intangible  personal  property, 
consisting,  for  example,  of  shares  of  stock  in  foreign  corpo- 
rations, and  no  constitutional  provision  is  thereby  violated.9 
Naturally,  therefore,  they  also  have  the  power  to  tax  income 
derived  from  such  sources,  and  this  has  generally  been  pro- 
vided for  in  the  income  tax  laws  of  the  states.  In  Hawaii, 
it  is  true,  the  tax  is  levied  on  "income  derived  by  every  per- 
son residing  in  the  territory  of  Hawaii  from  all  property 
owned,  and  all  business,  trade,  profession,  employment,  or 
vocation  carried  on  in  the  territory."  10  But  this  is  excep- 
tional. In  South  Carolina,  the  provision  of  the  statute  is 
somewhat  ambiguous.  It  lays  the  tax  upon  "income  received 
during  the  preceding  calendar  year  by  every  citizen  of  this 
state,  whether  such  gains,  profits,  or  income  be  derived  from 
any  kind  of  property,  rents,  interests,  dividends,  or  salaries, 
or  from  any  profession,  trade,  employment  or  vocation  car- 
ried on  in  this  state,  or  from  any  other  source  whatever."  X1 
On  the  ordinary  principles  of  statutory  construction,  the  words 

i  Cesena  Sulphur  Co.  v.  Nicholson,  L.  R.  1  Ex.  Div.  428 ;  Imperial 
Continental  Gas  Ass'n  v.  Nicholson,  37  Law  T.  717,  1  Tax  Cas.  138 ; 
Scottish  Mortgage  Co.  v.  McKelvie,  24  Scotch  Law  Rep.  87,  2  Tax 
Cas.  165. 

s  Gilbertson  v.  Fergusson,  L.  R.  7  Q.  B.  Div.  562,  1  Tax  Cas.  501. 

»  Darnell  v.  Indiana,  226  U.  S.  390.  33  Sup.  Ct.  120,  57  L.  Ed.  . 

10  Session  Laws  Hawaii  1901,  p.  31. 

11  Civ.  Code  S.  Car.  1902,  §  325. 

(128) 


Ch.  6)    PERSONS  AND  CORPORATIONS  SUBJECT  TO  TAX    §  59 

"carried  on  in  this  state"  should  be  referred  to  the  phrase 
"profession,  trade,  employment  or  vocation,"  leaving  the  pro- 
vision as  to  "property,  rents,  interests,  dividends,  or  salaries" 
entirely  unrestricted.  And  even  if  this  argument  should  fail, 
the  following  clause,  "from  any  other  source  whatever,"  is 
broad  enough  to  include  income  from  foreign  investments  or 
business.  In  Wisconsin  a  distinction  is  made  between  income 
from  foreign  investments  and  income  from  foreign  business. 
It  is  provided  that  "so  much  of  the  income  of  any  person 
residing  within  the  state  as  is  derived  from  rentals,  stocks, 
bonds,  securities  or  evidences  of  indebtedness  shall  be  assessed 
and  taxed,  whether  such  income  is  derived  from  sources 
within  or  without  the  state,"  which  is  explained  by  the  tax 
commission  of  that  state  as  being  "in  analogy  to  the  rule  that 
intangible  property  follows  the  residence  of  the  owner  for  pur- 
poses of  taxation."  But  the  statute  further  provides  that  "any 
person  engaged  in  business  within  and  without  the  state  shall, 
with  respect  to  income  other  than  that  derived  from  rentals, 
stocks,  bonds,  securities  or  evidences  of  indebtedness,  be  taxed 
only  upon  that  proportion  of  such  income  as  is  derived  from 
business  transacted  and  property  located  within  the  state."  12 
And  a  rule  for  determining  the  proportion  is  prescribed.13 

12  Wisconsin  Income  Tax  Law  1911,  §  1087m,  par.  2,  cl.  3. 

is  The  rule  to  be  followed,  as  far  as  applicable,  is  that  prescribed 
for  determining  the  proportion  of  a  corporation's  capital  stock  which 
is  employed  in  business  within  the  state,  and  is  as  follows:  "In  de- 
termining the  proportion  of  capital  stock  employed  in  the  state,  the 
same  shall  be  computed  by  taking  the  gross  business  in  dollars  of  the 
corporation  in  the  state  and  adding  the  same  to  the  full  value  in 
dollars  of  the  property  of  the  corporation  located  in  the  state.  The 
sum  so  obtained  shall  be  the  numerator  of  a  fraction  of  which  the 
denominator  shall  consist  of  the  total  gross  business  in  dollars  of  the 
corporation,  both  within  and  without  the  state,  added  to  the  full 
value  in  dollars  of  the  entire  property  of  the  corporation  both  within 
and  without  the  state.  The  fraction  so  obtained  shall  represent  the 
proportion  of  the  capital  stock  represented  within  the  state."  Stat. 
Wis.,  §  1770b,  subd.  e. 

BL.INC.TAX.— 9  (129) 


§  60  INCOME   TAXATION  (Ch.  6 

§  60.     Domestic  Corporations  with  Foreign  Branches   or 

Agencies 

Where  a  domestic  corporation  has  established  branch  offi- 
ces or  agencies  for  the  transaction  of  its  business  in  foreign 
countries,  the  profits  accruing  at  such  branches  or  agencies  are 
part  of  the  income  of  the  corporation,  and  will  be  taxable  at 
its  domicile,  if  the  law  of  that  jurisdiction  taxes  income  from 
foreign  business  as  well  as  from  foreign  investments,  as  is 
the  case  with  the  act  of  Congress  now  in  force.  But  it  is  im- 
portant to  distinguish  this  case  from  the  case  where  two  com- 
panies, one  domestic  and  the  other  foreign,  are  really  inde- 
pendent of  each  other,  though  constituent  members  of  a  pool  or 
trust,  or  united  in  interest  through  one  owning  stock  of  the 
other,  interlocking  directorates,  and  so  on.  Thus,  in  an  Eng- 
lish case,  it  appeared  that  a  company  was  formed  in  England 
for  the  purpose  of  bringing  under  a  single  control  all  the  man- 
ufacturers of  a  particular  kind  of  photographic  camera.  To 
do  this,  the  company  acquired  98  per  cent,  of  the  stock  of  an 
American  company,  and  retained  the  services  of  the  manager 
of  the  American  business.  The  remaining  shareholders  of 
the  American  company  were  independent  of  the  English  com- 
pany. The  English  company  by  power  of  attorney  appointed 
the  American  manager  its  proxy  to  vote  for  it  at  meetings  of 
the  American  company.  The  two  companies  bought  and  sold 
goods  to  each  other  in  the  ordinary  way.  On  this  state  of  facts 
it  was  held  that  the  business  of  the  American  company  was 
not  the  business  of  the  English  company,  so  as  to  be  assessable 
for  income  tax  in  England,  the  control  exercised  by  the  English 
company  being  the  control  of  the  stockholders  only.1*  But  on 
the  other  hand,  a  contrary  decision  was  made  in  the  case  of  an 
English  company  formed  for  the  purpose  of  acquiring  brewer- 
ies in  the  United  States,  because  it  was  shown  that  the  Eng- 
lish directors  exercised  effective  and  constant  control  over 

i*  Kodak  Limited  v.  Clark  [1901]  2  K.  B.  879,  4  Tax  Cas.  549. 
(130) 


Ch.  6)    PERSONS  AND  CORPORATIONS  SUBJECT  TO  TAX    §  60 

the  business.  The  operations  connected  with  the  manufacture 
and  sale  of  the  beer  took  place  in  the  United  States,  and  were 
carried  on  by  an  American  committee  of  management  ap- 
pointed by  the  company.  This  committee  were  in  constant 
correspondence  with  the  board  of  directors  in  England,  and 
the  general  meetings  of  the  company  were  held  in  England, 
where  the  company's  books  were  kept,  except  those  relating  to 
business  carried  on  in  the  United  States.  The  dividends  were 
declared  in  England  by  the  company  in  general  meeting.  Only 
a  portion  of  the  profits  made  was  remitted  to  England,  the 
amount  needed  for  the  dividends  payable  to  American  share- 
holders being  retained  in  America  for  distribution.  It  was 
held  that  the  business  of  the  company  was  carried  on  in  Eng- 
land, and  that  the  company  was  there  assessable  to  income 
tax  upon  the  whole  of  the  profits  made,  whether  remitted  to 
England  or  not.16 

But  in  view  of  the  fact  that  the  income  tax  laws  affect  only 
"income  received"  by  the  person  or  corporation,  it  is  impor- 
tant to  inquire  more  closely  whether  profits  earned  at  the  for- 
eign branches  or  agencies  of  a  domestic  corporation  are  tax- 
able as  a  part  of  its  income  if  they  are  not  remitted  in  money 
to  the  home  office,  but  retained  abroad  for  payment  of  divi- 
dends, investment,  or  other  purposes.  On  this  question  there 
are  no  American  decisions.  The  English  cases  are  numerous 
and  instructive,  but  not  entirely  harmonious.  At  first,  it  was 
the  disposition  of  those  courts  to  regard  the  tax  as  falling 
only  on  profits  actually  received  in  cash.  Thus,  in  a  leading 
case  it  appeared  that  a  company  was  formed  in  England  to  ac- 
quire certain  brewing  businesses  in  the  state  of  New  York, 
and  as  the  law  of  that  state  would  not  permit  a  foreign  cor- 
poration to  own  and  carry  on  a  brewery  there,  an  American 
company  was  formed,  the  whole  of  the  shares  of  which  were 
taken  by  the  English  company,  except  seven  shares  which 

is  Frank  Jones  Brewing  Co.  v.  Apthorpe,  4  Tax  Cas.  6;  Apthorpe 
v.  Peter  Schoenhofen  Brewing  Co.,  80  Law  T.  395,  4  Tax  Cas.  41. 

(131) 


§60  INCOME   TAXATION  (Ch.  6 

were  held  by  the  directors  of  the  American  company.  So 
much  of  the  profit  was  sent  over  to  the  English  company  in 
London  as  was  required  for  distribution  in  dividends  to  such 
of  its  shareholders  as  resided  in  England,  but  the  shareholders 
resident  in  America  received  their  dividends  there  out  of  prof- 
its retained  in  America  for  that  purpose.  It  was  held  that  the 
income  tax  was  chargeable  only  on  the  profits  received  in 
England  by  the  English  company.16  Another  case  concerned 
a  life  insurance  company  established  in  Scotland  and  carrying 
on  business  abroad.  The  business  was  managed  by  directors, 
who  had  the  power  of  accepting  risks,  but  all  investments 
abroad  had  to  be  sanctioned  at  the  head  office.  Remittances 
in  cash  of  interest  received  abroad  were  not  made,  and  remit- 
tances out  of  the  receipts  abroad  of  interest  and  premiums 
were  made  only  as  required  by  the  general  policy  of  the  com- 
pany. At  a  quinquennial  valuation,  and  in  the  yearly  state- 
ments of  accounts,  the  whole  of  the  receipts  abroad,  includ- 
ing the  interest  on  investments  abroad,  was  brought  into  ac- 
count in  the  division  of  the  profits  of  the  company.  It  was 
held  that  the  interest  received  abroad  and  invested  or  applied 
abroad  was  not  "received"  in  Scotland,  so  as  to  be  taxable 
there.17 

But  other  cases,  including  some  of  the  later  decisions,  have 
evolved  the  rule  that  income  may  be  "constructively  received/' 
so  as  to  be  taxable,  if  it  is  entered  on  the  books  of  the  com- 
pany as  cash,  or  locally  applied  or  invested  by  direction  of  the 
head  office.  Thus,  an  English  insurance  company  with  branch- 
es in  India  was  in  the  receipt  of  certain  interest  moneys,  paid  in 


i«  Bartholomay  Brewing  Co.  v.  Wyatt  [1893]  2  Q.  B.  499,  3  Tax 
Gas.  213.  And  see  Stanley  v.  The  Gramophone  &  Typewriter  Lim- 
ited [1908]  2  K.  B.  89,  5  Tax  Gas.  358 ;  Gresham  Life  Assur.  Soc.  v. 
Bishop  [1902]  App.  Gas.  287,  reversing  [1901]  1  K.  B.  153,  4  Tax  Gas. 
464 ;  Nobel  Dynamite  Trust  Co.  v.  Wyatt  [1893]  2  Q.  B.  499,  3  Tax 
Gas.  224. 

IT  Standard  Life  Assur.  Co.  v.  Allan,  38  Scotch  Law  Rep.  628,  4 
Tax  Cas.  446. 

(132) 


Ch.  6)    PERSONS  AND  CORPORATIONS  SUBJECT  TO  TAX    §  60 

India,  from  investments  there  and  in  the  colonies.  This  in- 
terest was  applied  in  India  towards  the  payment  of  the  va- 
rious obligations  of  the  company  arising  for  settlement  in 
India,  including  losses  under  its  policies,  and  was  not  re- 
mitted in  money  to  England,  but  it  was  treated  in  the  com- 
pany's accounts  as  if  it  had  been  so  remitted.  It  was  held  that 
the  interest  was  constructively  received  in  England  and  was 
therefore  taxable.18  In  another  case  it  appeared  that  an  in- 
surance company  was  organized  in  England,  and  had  its  head 
office  and  directorate  there,  but  also  carried  on  business  in  cer- 
tain foreign  countries,  and  by  the  laws  of  those  countries  it 
was  required,  as  a  condition  to  the  right  to  do  business  there, 
to  deposit  certain  sums  of  money  with  government  officials 
and  to  invest  the  money  in  accordance  with  local  laws.  In  ad- 
dition to  this,  the  company  also  voluntarily  invested  abroad 
certain  other  sums  representing  accumulated  profits  of  its 
business.  Both  classes  of  investments  yielded  interest,  which 
was  received  by  the  company  abroad,  but  was  not  remitted  to 
England.  It  was  held  that  the  company  was  taxable  in  Eng- 
land on  the  income  consisting  of  such  interest  from  both 
classes  of  investments.19  Again,  an  English  corporation  had 
its  head  office  in  London,  where  meetings  of  the  directors  and 
shareholders  were  held,  and  from  whence  the  affairs  of  the 
company  were  directed  and  managed.  The  company  carried 
on  the  business  of  banking  in  London,  Miexico,  and  Lima.  At 
the  branch  offices  it  transacted  all  ordinary  banking  business, 
and  in  London  it  transacted  the  London  business  of  the  branch- 
es, but  not  the  business  of  current  banking  accounts.  It  was 
held  that  the  whole  profits  were  chargeable  for  the  income  tax, 

is  Universal  Life  Assur.  Soc.  v.  Bishop,  68  Law  J.  Q.  B.  962,  4  Tax 
Cas.  139.  And  see  Scottish  Provident  Inst.  v.  Allan,  38  Scotch  Law 
Rep.  874,  4  Tax  Cas.  409 ;  San  Paulo  Ry.  Co.  v.  Carter  [1895]  1  Q. 
B.  580,  3  Tax  Cas.  344,  affirmed  [1896]  App.  Cas.  31 ;  Grove  v.  El- 
liots, 3  Tax  Cas.  481. 

i»  Liverpool,  L.  &  G.  Ins.  Co.  v.  Bennett  [1911]  2  K.  B.  577.  And 
see  Norwich  Union  Fire  Ins.  Co.  v.  Magee,  3  Tax  Cas.  457. 

(133) 


§  61  INCOME    TAXATION  (  Ch.  6 

whether  remitted  to  England  or  not.20  But  this  doctrine  has 
not  met  with  universal  acceptance.  In  a  case  arising  in  Scot- 
land, it  was  shown  that  a  Scotch  insurance  company  lent  out 
sums  of  money  at  interest  in  Australia,  and  that  the  interest 
accruing  was  not  remitted  to  Great  Britain  in  forma  specifica, 
but  was  retained  abroad  and  invested  there,  but  it  was  entered 
in  the  revenue  account  of  the  company  as  received.  On  this 
state  of  facts  it  was  held  that  interest  not  received  in  Great 
Britain  was  not  assessable  for  the  income  tax,  and  that  the 
facts  in  the  case  did  not  show  a  constructive  remittance.21 

§  61.     Non-Residents  and  Aliens 

The  federal  income  tax  law  provides  for  the  taxation  of  the 
income  "received  from  all  sources"  of  "every  citizen  of  the 
United  States,  whether  residing  at  home  or  abroad."  Hence 
American  citizens  who  take  up  a  residence  abroad,  whether 
temporary  or  permanent,  and  whether  from  choice  or  for  busi- 
ness purposes  (including  diplomatic  and  consular  officers)  re- 
main liable  for  the  income  tax.  Theoretically  such  persons  are 
taxable  upon  their  entire  income  (above  the  statutory  exemp- 
tion) no  matter  how  or  whence  derived.  But  practically,  of 
course,  the  tax  could  be  collected  only  on  so  much  of  the  in- 
come as  accrued  and  was  payable  within  the  United  States ;  so 
that,  while  the  language  of  the  statute  would  apply,  for  ex- 
ample, to  the  case  of  an  American  residing  abroad  and  re- 
ceiving a  salary  from  a  foreign  government  or  from  a  foreign 
corporation,  the  necessity  of  the  case  would  restrict  its  applica- 
tion. 

The  law  also  is  made  applicable  to  the  case  of  an  alien  living 
within  the  United  States.  For  it  includes  "every  person  re- 
siding in  the  United  States,  though  not  a  citizen  thereof,"  and 

20  London  Bank  of  Mexico  v.  Apthorpe  [1892]  2  Q.  B.  Div.  378,  3 
Tax  Gas.  143. 

21  Forbes  v.  Scottish  Provident  Inst,  33  Scotch  Law  Rep.  228,  3 
Tax  Cas.  443. 

(134) 


Ch.  6)    PERSONS  AND  CORPORATIONS  SUBJECT  TO  TAX    §  61 

resident  aliens  are  taxed  on  exactly  the  same  basis  as  citizens. 
Such  a  provision  is  common  in  the  income  tax  laws  of  other 
countries,22  and  the  authority  of  any  government  to  tax,  not 
only  the  property,  but  also  the  income,  of  foreigners  residing 
within  its  territory  cannot  be  doubted.  Indeed  it  has  been  ex- 
pressly decided  that  such  a  feature  does  not  render  an  income 
tax  law  unconstitutional  or  in  any  way  invalid.23 

A  further  case  is  that  of  persons  who  are  neither  citizens 
of  the  United  States  nor  resident  within  its  borders,  but  a  part 
of  whose  income  is  earned  or  gained  in  this  country.  As  to 
this,  the  act  of  Congress  provides  for  the  levy  of  the  income 
tax  upon  "the  entire  net  income  from  all  property  owned  and 
of  every  business,  trade,  or  profession  carried  on  in  the  United 
States  by  persons  residing  elsewhere."  And  the  income  tax 
laws  of  the  several  states  contain  almost  exactly  similar  pro- 
visions, which  of  course  are  applicable  not  only  to  non-resi- 
dent aliens,  but  also  to  residents  and  citizens  of  other  states 
owning  property  or  doing  business  within  the  taxing  state.  In 
Wisconsin,  however,  the  provision  is  expressed  in  broader 
terms,  for  the  tax  is  made  payable  "by  every  non-resident  of 
the  state  upon  such  income  as  is  derived  from  sources  within 
the  state  or  within  its  jurisdiction."  The  earlier  acts  of  Con- 
gress on  the  subject  made  no  attempt  to  tax  income  accruing  in 
America  to  non-resident  aliens.  That  is  to  say,  no  such  provi- 
sion was  found  in  the  acts  of  1861,  1862,  or  1864,  though  it  was 
introduced  in  the  statute  of  1866  and  continued  in  subsequent 
enactments.  And  it  was  held,  under  the  act  of  1864,  that  a 
non-resident  alien  was  not  subject  to  the  income  tax  in  respect 
to  his  investments  in  American  securities;  and  though  that 
act  required  corporations  paying  interest  on  their  bonds  to  de- 

2  2  For  instances  of  American  citizens  held  subject  to  the  English 
income  tax,  because  more  or  less  permanently  "resident"  in  Great 
Britain,  see  Brown  v.  Burt,  81  Law  J.  K.  B.  17;  Cooper  v.  Cadwal- 
ader,  5  Tax  Cas.  101. 

23  Moore  v.  Miller,  5  App.  D.  C.  413. 

(135) 


§  61  INCOME    TAXATION  (  Ch.  6 

duct  from  the  interest  payments  the  amounts  due  as  income 
tax  thereon  from  the  several  bondholders,  this  did  not  apply  to 
a  non-resident  alien  owning  such  bonds,  and  if  the  corporation 
deducted  such  tax  from  the  interest  due  him,  he  could  recover 
it  by  suit.24  This  being  changed  by  the  explicit  provisions  of 
the  act  now  in  force,  it  becomes  important  to  notice  a  decision 
of  the  Supreme  Court  of  the  United  States  under  one  of  the 
earlier  statutes.  It  was  held  that  an  excise  tax  on  corpora- 
tions, laid  on  or  measured  by  the  amount  paid  out  by  them  in 
the  form  of  dividends  or  interest,  is  not  invalidated  by  a  pro- 
vision that  the  amount  of  such  tax  may  be  withheld  from  the 
dividend  or  interest  due  or  payable  to  a  stockholder  or  bond- 
holder, who  is  a  citizen  or  subject  of  a  foreign  government 
with  no  residence  in  this  country.25 

As  to  a  non-resident  "doing  business"  within  the  jurisdic- 
tion imposing  the  tax,  the  state  laws  may  apply  to  the  ordinary 
case  of  a  person  residing  in  one  state  and  conducting  a  busi- 
ness in  another,  as  well  as  to  corporations  organized  under  the 
laws  of  one  state,  but  having  offices,  branches,  or  agencies  in 
many  others,  and  to  railroads  or  other  transportation  companies 
which  traverse  two  or  more  states.  Under  the  laws  of  the  Unit- 
ed States,  the  incidence  of  the  income  tax  will  chiefly  affect  cor- 
porations, whose  business  is  of  an  international  character,  for- 
eign insurance  companies  writing  risks  in  the  United  States,  and 
foreign  corporations  owning  and  operating  mills,  factories,  or 
mines  in  this  country.  As  concerns  this  subject,  no  American 
decisions  have  as  yet  been  rendered.  But  upon  the  construction 
of  the  corporation  tax  law  of  1909,  an  opinion  was  given  by  the 
Attorney  General  to  the  effect  that  foreign  steamship  com- 
panies engaged  in  the  business  of  transporting  passengers, 
goods,  and  merchandise  between  ports  in  this  country  and  for- 

2*  Jackson  v.  Northern  Cent.  Ry.,  Chase,  268,  Fed.  Cas.  No.  7,142. 
20  Railroad   Company   v.    Collector   (Michigan   Central   R.    Co.    v. 
Slack)  100  U.  S.  595,  25  L.  Ed.  647. 

(136) 


Ch.  6)    PERSONS  AND  CORPORATIONS  SUBJECT  TO  TAX    §  61 

eign  ports,  and  maintaining  freight  and  passenger  agencies  in 
this  country,  were  subject  to  the  tax;  and  whereas  it  was  con- 
tended that  a  part  of  the  business  of  such  companies  was  the 
transportation  of  articles  of  merchandise  shipped  from  this 
country  for  foreign  trade,  and  that  such  business  could  not 
constitutionally  be  taxed,  the  opinion  was  given  that  a  tax  im- 
posed upon  an  exporter  of  merchandise,  as  an  incident  to  his 
business,  is  not  a  tax  upon  the  exported  article,  as  an  export, 
and  hence  not  forbidden  by  the  constitution.26  But  a  foreign 
steamship  company  having  no  office  in  the  United  States,  and 
whose  vessels  only  occasionally  touch  at  American  ports,  was 
not  regarded  as  doing  business  in  this  country,  within  the 
meaning  of  that  act.27 

The  British  income  tax  law  includes  non-resident  aliens,  in 
so  far  as  they  "exercise  a  trade"  in  Great  Britain.  And  it  is 
held  when  a  foreign  corporation  or  individual  has  an  agency 
for  the  sale  of  its  products  in  England,  the  agent  being  charged 
with  the  duty  of  procuring  orders,  which  are  then  sent  to  the 
head  office  abroad,  and  the  goods  are  shipped  either  to  the 
agent  for  distribution  or  direct  to  the  customers,  and  payment 
is  made  either  to  the  agent  or  direct  to  the  foreign  office,  such 
corporation  or  person  "exercises  a  trade"  in  England  and  is 
subject  to  the  income  tax  on  the  profits  thereof,  collectible 
from  the  agent.28  So  in  a  Scotch  case,  it  appeared  that  a  com- 
pany registered  in  Norway,  where  its  head  office  was  maintain- 
ed and  its  books  kept  and  corporate  meetings  held,  was  under 
the  general  management  of  two  Norwegians,  elected  by  the 
stockholders.  This  company  owned  a  ship,  and  all  the  busi- 
ness of  the  chartering  of  the  vessel,  and  all  voyage  receipts 

26  28  Opin.  Atty.  Gen.  211. 

27  Treasury  Decisions,  Xo.  1742,  par.  21. 

28  Werle  &  Co.  v.  Colquhoun,  L.  R.  20  Q.  B.  Div.  753,  2  Tax  Gas. 
402;    Turner  v.  Rickman,  4  Tax  Cas.  25;   Tischler  v.  Apthorpe,  52 
Law  T.  814,  2  Tax  Cas.  89.    But  see  Grainger  v.  Gough  [1896]  App. 
Cas.  325. 

(137) 


§  62  INCOME   TAXATION  (  Ch.  6 

and  disbursements,  were  dealt  with  by  a  firm  resident  in  Glas- 
gow, who  received  and  retained  all  the  funds  until  required  for 
payment  of  expenses  or  dividends.  It  was  held  that,  although 
the  company  was  not  resident  in  Great  Britain,  t  it  exercised 
a  trade  within  the  United  Kingdom,  for  the  profits  of  which 
the  Glasgow  firm,  as  its  agents,  were  assessable  for  the  purpose 
of  the  income  tax.29  In  another  case  it  was  shown  that  a  for- 
eign corporation,  domiciled  abroad,  had  submarine  cables  in 
connection  with  England  and  other  foreign  cables  not  so  con- 
nected. The  company,  under  an  agreement  with  the  English 
authorities,  also  had  separate  wires,  worked  by  its  own  staff, 
between  several  English  towns  and  cities.  No  profits  were  de- 
rived from  the  transmission  of  messages  over  these  last-men- 
tioned wires.  It  was  held  that  the  company  exercised  a  trade 
in  Great  Britain  and  was  assessable  on  the  net  profits  derived 
from  the  receipts  in  England.30 

§  62.     Carrying  on  of  Business  or  Trade 

In  addition  to  the  illustrations  given  in  the  preceding  sec- 
tion, which  had  to  do  only  with  the  particular  case  of  non-resi- 
dents, we  may  here  give  some  further  account  of  what  is 
meant  by  "business"  and  "trade"  in  general,  since  these  terms 
are  constantly  used  in  describing  the  sources  of  taxable  income 
or  the  persons  and  corporations  subject  to  the  tax.  The  two 
words  quoted,  when  associated  together,  take  color  from  each 
other.  But  even  as  thus  limited,  the  term  "business"  is  a  word 
of  very  wide  import  and  embraces  every  thing  about  which  a 
person  can  be  employed  or  which  he  can  pursue  as  an  occupa- 
tion and  for  profit.31  It  implies,  however,  continuity  of  action 
or  effort,  and  does  not  include  an  isolated  act  or  operation, 
when  transactions  of  the  same  sort  do  not  constitute  the  per- 


2»  Wingate  v.  Webber,  34  Scotch  Law  Rep.  699,  3  Tax  Gas.  569. 

so  Erichsen  v.  Last,  L.  R.  7  Q.  B.  Div.  12,  1  Tax  Cas.  351. 

si  People  v.  Commissioners  of  Taxes,  22  How.  Prac.  (N.  Y.)  143. 

(138) 


Ch.  6)    PERSONS  AND  CORPORATIONS  SUBJECT  TO  TAX    §  62 

son's  vocation,32  and  probably  it  should  not  be  so  extended  as 
to  include  illicit  pursuits,  such  as  keeping  a  gaming  house  or 
selling  liquor  without  a  license.33  In  construing  the  corpora- 
tion tax  law  of  1909,  the  Supreme  Court  of  the  United  States, 
not  meaning  to  enumerate  all  possible  kinds  of  "business,"  but 
with  reference  to  the  facts  in  the  group  of  cases  before  it, 
said :  "We  think  it  clear  that  corporations  organized  for  the 
purpose  of  doing  business,  and  actually  engaged  in  such  ac- 
tivities as  leasing  property,  collecting  rents,  managing  office 
buildings,  making  investments  of  profits,  or  leasing  ore  lands 
and  collecting  royalties,  managing  wharves,  dividing  profits, 
and  in  some  cases  investing  the  surplus,  are  engaged  in  busi- 
ness within  the  meaning  of  this  statute,  and  in  the  capacity 
necessary  to  make  such  organizations  subject  to  the  law."  3* 
And  in  the  same  case  it  was  specifically  held  that  a  company 
owning  and  leasing  taxicabs  and  collecting  rents  therefrom 
was  engaged  in  business  within  the  meaning  of  the  statute. 
"Trade"  is  a  term  more  particularly  applied  to  the  operations 
of  commerce,  and  especially  to  the  buying  and  selling  of  com- 
modities or  the  traffic,  sale,  or  barter  of  goods.  But  it  is  legiti- 
mately capable  of  a  wider  meaning,  and  may  be  so  intended 
when  used  in  a  tax  statute  and  in  connection  with  "business." 
Thus,  an  English  decision  holds  that  the  ownership  and  em- 
ployment of  vessels,  which  are  employed  in  the  transportation 
of  merchandise  for  hire,  is  a  "trade"  or  concern  in  the  nature 
of  a  trade,  within  the  meaning  of  an  act  imposing  taxes.35  So 
in  a  case  in  North  Carolina,  construing  a  provision  of  the  con- 
stitution authorizing  the  legislature  to  tax  "trades,  professions, 

32  People  v.  Commissioners  of  Taxes,  23  N.  Y.  242;  Parkhurst  v. 
Brock,  72  Vt.  355,  47  Atl.  1068 ;  Delaware  &  H.  Canal  Co.  v.  Mah- 
lenbrock,  63  N.  J.  Law,  281,  43  Atl.  978,  45  L.  R.  A.  538. 

SB  Odell  v.  City  of  Atlanta,  97  Ga.  670,  25  S.  E.  173;  Walsch  v. 
Call,  32  Wis.  159. 

34  Flint  v.  Stone  Tracy  Co.,  220  U.  S.  107,  31  Sup.  Ct.  342,  55  L. 
Ed.  389. 

a  5  Attorney  General  v.  Borrodaile,  1  Price,  148. 

(139) 


§  63  INCOME   TAXATION  (Ch.  6 

franchises,  and  income,"  it  was  said  that  the  word  "trade"  is 
employed  in  its  broadest  signification,  and  comprehends,  not 
only  all  who  are  engaged  in  buying  and  selling  merchandise, 
but  all  whose  occupation  or  business  it  is  to  manufacture  and 
sell  the  products  of  their  plants,  and  includes  in  this  sense  any 
employment  or  business  embarked  in  for  gain  or  profit.36 

§  63.     Carrying  on  Several  Lines  of  Business 

If  a  person  or  corporation  carries  on,  at  the  same  time,  sev- 
eral different  lines  or  branches  of  business,  the  resulting  in- 
come is  to  be  assessed  and  taxed  as  an  entirety,  and  not  as  so 
many  separate  incomes  from  the  different  kinds  of  business. 
This  is  shown  by  the  language  of  the  act  of  Congress,  which 
imposes  the  tax,  both  in  the  case  of  individuals  and  of  corpora- 
tions, on  "the  entire  net  income  received  from  all  sources." 
And  under  the  corporation  excise  tax  law  of  1909,  it  was  ruled 
that  railroad  companies  operating  leased  or  purchased  lines 
must  include  all  receipts  derived  therefrom  in  their  return  of 
net  income.37  This  is  also  the  rule  in  England.  Thus,  where 
an  insurance  company,  being  a  single  concern  and  having  only 
one  body  of  stockholders,  carries  on  the  business  of  fire,  marine, 
and  life  insurance,  and  the  funds  and  accounts  of  the  several 
branches  of  the  business  are  kept  separate,  but  the  results  of 
the  whole  business  are  thrown  into  one  profit  and  loss  account, 
and  the  dividends  are  declared  out  of  the  balance  of  that  ac- 
count, it  is  held  that,  for  the  purpose  of  the  income  tax,  the 
several  branches  must  be  treated  as  one  business,  and  the  net 
profits  from  all  are  assessable  as  one  undivided  income.38 
There  is,  however,  one  decision  of  the  Court  of  Session  in 
Scotland  which  is  not  easily  to  be  reconciled  with  the  general 

ss  State  v.  Worth,  116  N.  C.  1007,  21  S.  E.  204. 

3?  Treasury  Decisions,  No.  1742,  par.  8. 

38  Last  v.  London  Assur.  Corp.,  L.  R.  12  Q.  B.  Div.  389,  2  Tax  Cas. 
100;  Scottish  Union  &  N.  Ins.  Co.  v.  Smiles,  26  Scotch  Law  Rep. 
330,  2  Tax  Cas.  551. 

(140) 


Ch.  6)    PERSONS  AND  CORPORATIONS  SUBJECT  TO  TAX    §  64 

rule  as  thus  stated.  It  was  there  held  that  a  seed-merchant, 
taking  a  farm  and  working  it  in  connection  with  his  seed  busi- 
ness, cannot  claim  any  deduction  from  the  assessment  on 
his  profits  as  seedsman  in  respect  of  losses  incurred  in  the  op- 
eration of  the  farm,  that  is,  profits  arising  from  one  branch  of 
the  business  cannot  be  offset  by  the  expenses  or  losses  of  the 
other.39 

.  But  the  general  rule  applies  only  in  cases  where  each  branch 
or  department  of  the  business  is  wholly  owned  and  operated 
by  the  taxable  person  or  corporation.  If  any  is  owned  and 
operated  jointly  with  another  person  or  company,  it  must  be 
segregated  and  separately  assessed.  Thus,  in  an  English  case, 
it  appeared  that  the  corporation  in  question  originally  owned 
one  steamship  and  derived  its  income  from  the  operation  of 
the  vessel  as  a  carrier  of  freight.  Afterwards  it  acquired  a 
very  large  interest,  but  not  quite  the  entire  ownership,  in  a 
second  steamship,  taking  over  the  management  and  keeping  the 
accounts  thereof,  and  it  claimed  to  be  assessed  on  the  average 
of  the  profits  derived  from  the  two  ships  in  one  sum.  But  it 
was  held  that  the  second  ship  was  a  concern  carried  on  by  two 
or  more  persons  jointly,  and  therefore  its  profits  must  be 
separately  assessed.40 

§  64.     Salaried  Officers 

Attention  was  given  in  an  earlier  section  of  this  volume  to 
the  constitutional  validity  of  income  taxation  as  applied  to  the 
salaries  of  federal  and  state  officers.41  And  it  was  there  shown 
that,  although  the  United  States  cannot  tax  the  salary  of  a 
state  officer,  or  vice  versa,  yet,  in  the  absence  of  explicit  con- 
stitutional restrictions,  there  is  nothing  to  prevent  Congress 
from  taxing  the  compensation  of  the  officers  of  the  federal 

3»  Brown  v.  Watt,  23  Scotch  Law  Rep.  403,  50  J.  P.  583,  2  Tax 
Cas.  143. 

40  Farrell  v.  Sunderland  Steamship  Co.,  88  Law  T.  741,  4  Tax  Cas. 
005. 

41  Supra,  §  18. 

(141) 


§64  INCOME   TAXATION  (Ch.  6 

government,  or  to  prevent  a  state  from  taxing  the  salaries 
of  its  own  officers  or  those  of  its  municipalities.  This  is  in 
accordance  with  the  rules  prevailing  in  other  countries  where 
income  tax  laws  are  in  force.  Thus,  in  Canada,  a  government 
official  or  employe  is  taxable  on  his  income  received  in  the 
form  of  a  salary.42  It  was  held  in  Ontario  that  the  income 
of  an  officer  of  the  House  of  Commons  of  the  Dominion  of 
Canada  could  not  be  taxed  by  a  provincial  legislature  or  by  a 
municipality  of  the  province.43  "But  this  was  overruled  by  the 
Supreme  Court  of  Canada,  which  held  that  any  civil  or  other 
officer  of  the  Dominion  might  be  lawfully  taxed  in  respect  to 
his  income  as  such  by  the  municipality  in  which  he  resides.44 
And  the  highest  court  in  England  has  ruled  that  an  officer  of 
the  Commonwealth  of  Australia  who  resides  in  Victoria  and 
receives  his  salary  in  that  state,  is  liable  to  be  assessed  in  re- 
spect of  his  official  salary  for  an  income  tax  imposed  by  the 
legislature  of  Victoria.45 

But  laws  of  this  kind  are  construed  with  strictness,  and  the 
salary  attached  to  a  public  office  is  not  to  be  brought  within 
the  reach  of  the  income  tax  without  explicit  language  to  that 
effect.  Thus  it  was  ruled,  in  an  early  case  in  South  Carolina, 
that  the  salaries  of  public  officers  are  not  liable  to  be  taxed 
under  an  ordinance  imposing  a  tax  on  all  profit  or  income 
arising  from  the  "pursuit  of  any  faculty,  profession,  occupa- 
tion, trade,  or  employment."  46  And  the  court  in  Virginia 
decided  that,  when  the  tax  is  laid  upon  salary  or  compensa- 
tion for  services,  received  by  any  person  in  the  employment  of 
a  corporation,  it  will  be  held  not  to  include  the  salary  paid  to 
a  minister  of  the  Gospel  by  the  church  or  congregation  of 

42  Abbott  v.  City  of  St.  John,  40  Can.  Sup.  Ct.  597,  12  Am.  &  Eng. 
Ann.  Cas.  821 ;   Robson  v.  Regina,  4  Terr.  L.  R.  80. 

43  Leprohon  v.  Ottawa,  2  Ont.  App.  522. 

4*  Abbott  v.  City  of  St.  John,  40  Can.  Sup.  Ct.  597,  12  Am.  &  Eng. 
Ann.  Cas.  821. 

45  Webb  v.  Outrim  [1907]  App.  Cas.  81,  7  Am.  &  Eng.  Ann.  Cas.  84. 
4«  City  Council  v.  Lee,  1  Treadw.  (S.  C.)  57. 


Ch.  6)    PERSONS  AND  CORPORATIONS  SUBJECT  TO  TAX    §  64 

which  he  has  charge,  for  it  must  be  understood  that  the  legis- 
lature meant  only  secular  employment.47  But  the  modern 
statutes  employ  language  broad  enough  to  cover  all  kinds  of 
remuneration  for  services  rendered  by  employes,  however 
denominated.  Thus,  the  act  of  Congress  applies  to  "income 
derived  from  salaries,  wages,  or  compensation  for  personal 
service  of  whatever  kind  and  in  whatever  form  paid."  And 
the  Wisconsin  statute,  in  defining  "income,"  includes  "all 
wages,  salaries,  or  fees  derived  from  services."  The  tax  com- 
mission of  that  state  explains  that  "fees  derived  from  services 
would  not  include  the  fees  belonging  to  the  state  or  any 
political  subdivision.  For  example,  if  a  sheriff  receives  a 
salary  and  turns  over  the  fees  received  by  him  in  his  official 
capacity  to  the  county,  they  would  not  be  reckoned  as  income. 
If  he  receives  the  fees  in  lieu  of  salary,  such  fees  would  con- 
stitute income."48  In  this  connection  it  is  also  necessary  to 
remark  that,  although  a  corporation  may  be  exempt  from 
taxation,  in  respect  to  its  own  income,  as  being  a  religious, 
charitable,  or  educational  institution,  it  does  not  follow  that 
its  employes  are  likewise  exempt.  Thus,  the  salary  of  a 
professor  in  a  college  is  not  exempt  from  the  income  tax, 
though  the  revenue  of  the  college  may  be  exempt.49  The  act 
of  Congress  of  1913  contains  a  provision  that  "nothing  in  this 
section  shall  be  held  to  exclude  from  the  computation  of  the 
net  income  the  compensation  paid  any  official  by  the  govern- 
ments of  the  District  of  Columbia,  Porto  Rico,  and  the  Phil- 
ippine Islands  or  any  political  subdivision  thereof,"  in  other 
words,  the  salaries  of  these  officers  are  subject  to  the  income 
tax. 

47  Plumer  v.  Commonwealth,  3  Gratt.  (Va.)  645. 
<8  Wisconsin  Income  Tax  Law,  edition  issued  by  State  Tax  Com- 
mission, Madison,  Wis.,  November  1911,  pp.  9,  10. 
49  Union  County  v.  James,  21  Pa.  St.  525. 

(143) 


§65  INCOME   TAXATION  (Ch.  6 

§  65.     Bankrupt  and  Insolvent  Persons  and  Companies 

It  may  seem  an  anomaly  to  speak  of  a  bankrupt  or  insolvent 
person  being  subject  to  the  income  tax,  but  it  was  evidently 
in  the  contemplation  of  Congress,  in  enacting  the  law  of  1913, 
that  such  cases  might  arise,  as  witness  the  provision  that  the 
penalty  for  non-payment  shall  not  be  exacted  "from  the  es- 
tates of  insane,  deceased,  or  insolvent  persons."  It  is  a  gen- 
eral rule  of  law  that  a  bankrupt's  estate  is  not  withdrawn  from 
taxation  by  the  proceedings  in  bankruptcy,  but  remains  sub- 
ject to  taxation  in  the  hands  of  his  trustee.80  And  it  was  ruled 
under  the  corporation  excise  tax  law  of  1909  that,  where  a 
corporation  subject  to  the  tax  had  gone  into  bankruptcy,  the 
return  of  net  income  was  to  be  made  by  the  trustee  in  bank- 
ruptcy.51 So,  where  an  assignee  for  the  benefit  of  creditors 
carries  on  the  business  of  the  assignor,  and  makes  a  profit,  it 
is  subject  to  the  income  tax.  For  it  is  not  necessary  that  a 
business  should  be  carried  on  for  the  purpose  of  making  a 
profit  for  the  owner ;  it  is  none  the  less  carried  on  because  the 
object  is  to  earn  a  larger  dividend  for  creditors.52  The  same 
principle  would  apply  to  a  corporation  in  the  hands  of  a  re- 
ceiver. It  is  true  that  a  contrary  doctrine  prevailed  under  the 
corporation  tax  law  of  1909,  but  that  was  only  because  the 
tax  was  not  laid  on  the  income  of  the  corporation,  but  on  the 
privilege  of  doing  business  in  a  corporate  capacity.  Hence  it 
was  held  that  receivers  of  an  insolvent  corporation,  duly  ap- 
pointed by  a  court  of  equity,  which  corporation  was  not  doing 
business  when  the  act  was  passed,  and  had  done  no  business 
since,  were  not  within  the  act,  and  not  required  to  make  re- 
turns or  pay  taxes  on  the  income  realized  by  them  while  acting 
as  officers  of  the  court  and  under  its  direction.53  But  the  act 


so  in  re  Crowell,  199  Fed.  659. 
si  Treasury  Decisions,  No.  1742,  par.  7. 
52  Armitage  v.  Moore  [1900]  2  Q.  B.  363,  4  Tax  Cas.  199. 
B3  Pennsylvania  Steel  Co.  v.  New  York  City  Ry.  Co.,  198  Fed.  774. 
117  C.  C.  A.  556. 

(144) 


Ch.  6)    PERSONS  AND  CORPORATIONS  SUBJECT  TO  TAX    §  67 

of  Congress  now  in  force  imposes,  not  an  excise  tax  on  cor- 
porate business,  but  a  tax  on  all  incomes.  And  it  is  somewhat 
significant,  in  this  connection,  that  it  specially  mentions  "re- 
ceivers" as  among  those  persons  administering  the  affairs  of 
others  who  are  required  to  make  returns  for  them  and  with- 
hold and  deduct  the  income  tax. 

§  66.  Estates  of  Decedents  and  Dissolved  Corporations 
The  death  of  a  taxpayer  does  not  exempt  his  income  from 
taxation  for  the  current  year,  but  his  estate,  in  the  hands  of 
the  executor  or  administrator,  is  liable  for  the  tax  on  so  much 
of  the  income  of  the  year  as  accrued  prior  to  the  day  of  his 
death,54  the  income  for  the  remainder  of  the  year  being  of 
course  taxable  to  the  distributees  of  the  estate.  The  same 
principle  applies  upon  the  dissolution  of  a  corporation.  But 
it  was  held  that  a  corporation  which  had  continued  in  business 
through  a  calendar  year  could  not  evade  liability  for  the  tax 
imposed  by  the  act  of  Congress  of  1909,  by  dissolving  before 
the  time  when  it  was  required  to  make  a  return  and  have  the 
tax  assessed,  but  that  the  officers  of  the  corporation  still  had 
the  authority,  and  it  was  their  duty,  to  make  and  render  the 
return.5* 

§  67.     Partnerships 

It  has  never  been  the  policy  of  the  United  States  income 
tax  laws  to  lay  the  tax  on  partnerships,  as  distinct  from  the 
individuals  composing  them.  And  in  the  statute  now  in  force, 
partnerships  are  carefully  distinguished  from  corporations,  as 
in  the  section  relating  to  the  taxation  of  corporations,  where 
the  tax  is  made  payable  by  "every  corporation,  joint  stock 
company  or  association,  and  every  insurance  company,  or- 
ganized in  the  United  States,  no  matter  how  created  or  or- 
ganized, but  not  including  partnerships."  Under  provisions 

54  Mandell  v.  Pierce,  3  Cliff.  134,  Fed.  Gas.  No.  9,008. 
KG  United   States  v.   General  Inspection  &  Loading  Co.,  192  Fed. 
223. 

BL.INC.TAX.— 10  145 


§  67  INCOME    TAXATION  (Ch.  6 

of  this  kind  the  individual  taxpayer  is  chargeable  with  the 
tax  on  so  much  of  his  income  as  is  derived  from  the  profits 
of  a  firm  in  which  he  may  be  a  member  (after  allowing  the 
statutory  deductions  and  exemptions),  but  the  firm,  as  such, 
is  neither  required  to  make  a  return  nor  pay  a  tax.  This  was 
expressly  provided  for  in  the  act  of  1864,  and  though  omitted 
in  the  present  statute,  the  rule  must  be  read  into  it  by  neces- 
sary implication. 

The  laws  of  the  states  have  generally  pursued  a  contrary 
policy.  That  of  South  Carolina,  for  instance,  provides  that 
"the  words  'citizen'  and  'person,'  as  used  in  this  article,  shall 
be  deemed  to  include  all  natural  persons,  all  copartnerships, 
and  all  members  of  any  incorporated  association,  and  to  ex- 
clude, except  as  hereinafter  included,  all  corporations  duly 
chartered  by  the  laws  of  the  United  States  or  of  this  or  any 
other  state." 56  Under  this  statute,  it  appears,  both  the 
individual  and  the  firm  of  which  he  is  a  member  must  make  a 
return  and  pay  the  tax.  But  if  the  partnership  pays  the  tax 
on  its  income,  it  would  be  inequitable,  and  double  taxation, 
to  exact  a  tax  from  the  individual  upon  his  share  of  the  firm's 
profits,  and  such  an  exception  should  be  held  to  be  necessarily 
implied.  This  point  is  more  fully  covered  by  the  provisions 
of  the  Wisconsin  income  tax  law,  which  declares  that  the 
term  "person,"  as  used  in  the  act,  shall  include  "any  in- 
dividual, firm,  copartnership,"  etc.,  but  also  provides  that  the 
individual  taxpayer  may  deduct  from  his  income  as  returned 
for  taxation  "dividends  or  income  received  from  stocks,  or 
interest  in  any  firm,  copartnership,  corporation,"  etc.57 

§  68.     Limited  Partnerships 

Under  the  laws  of  some  of  the  states  (for  example,  Pennsyl- 
vania) limited  partnership  associations  may  be  organized 

66  Civ.  Code  S.  Car.  1902,  §  327. 

67  Wisconsin  Income  Tax  Law  1911,  §  1087m,  part  2,  par.  1 ;    Id., 
§  1087m,  part  4,  subd.  c. 

(146) 


Ch.  6)    PERSONS  AND  CORPORATIONS  SUBJECT  TO  TAX    §  69 

which  possess  all  the  essential  privileges  and  powers  of  cor- 
porations, including  the  right  to  transact  business  under  a 
name  indicating  rather  a  corporate  existence  than  an  associa- 
tion of  partners,  as,  by  the  use  of  the  word  "Company"  in 
the  name,  provided  that  the  name  shall  also  include  the  word 
"Limited,"  the  right  to  sue  and  be  sued  in  that  name,  the 
right  to  fix  the  limit  of  its  own  existence,  within  certain 
bounds,  and  to  have  a  capital  stock  divided  into  shares.  The 
members  of  such  an  association  are  not  individually  liable 
for  its  debts,  and  the  shares  or  interests  in  it  are  transfer- 
able by  the  owner,  provided  that  the  transferee  must  either 
be  elected  to  membership  by  the  remaining  members  or 
bought  out.  Under  the  corporation  excise  tax  law  of  1909, 
which  required  payment  of  the  tax  from  "every  corporation, 
joint  stock  company  or  association,"  the  opinion  was  given 
by  the  Attorney  General,  and  followed  by  the  officers  of  the 
treasury  department,  that  such  a  limited  partnership  was 
within  the  meaning  of  the  act,  and  was  liable  to  the  tax  if 
organized  for  profit  and  having  a  capital  stock  represented 
by  shares,  although  no  certificates  of  stock  were  issued.58 
It  seems  clear  that  such  an  association  would  also  be  included 
within  the  scope  of  the  income  tax  law  of  1913,  the  language 
of  the  law  being  the  same,  and  the  same  reasons  existing  as 
formerly  for  so  holding. 

§  69.     Corporations 

Corporations  are  subject  to  the  income  tax  under  the  act  of 
Congress  of  1913,  which  lays  the  tax,  subject  to  certain 
enumerated  exceptions,  upon  "every  corporation,  joint  stock 
company  or  association,  and  every  insurance  company,  organ- 
ized in  the  United  States,  no  matter  how  created  or  organiz- 
ed," and  also  upon  similar  companies  "organized,  authorized, 

B  s  28  Opin.  Atty.  Gen.  p.  189;  Treasury  Decisions,  No.  1742,  par. 
36.  And  see  Liverpool  Ins.  Co.  v.  Massachusetts,  10  Wall.  556.  19 
L.  Ed.  1029;  Moorhead  v.  Seymour,  77  N.  Y.  Supp.  1050.  Compare 
Chapman  v.  Barney,  129  U.  S.  677,  9  Sup.  Ct.  426,  32  L.  Ed.  800. 

(147) 


§  70  INCOME    TAXATION  (  Ch.  6 

or  existing  under  the  laws  of  any  foreign  country,"  in  so  far 
as  the  latter  transact  business  or  have  capital  invested  in  the 
United  States.  The  income  tax  law  of  Hawaii  taxes,  subject 
to  specified  exceptions,  "all  corporations  doing  business  for 
profit  in  the  territory,  no  matter  where  created  and  organ- 
ized." The  law  of  Wisconsin  taxes  "persons,"  but  declares 
that  the  term  "person"  shall  include  "every  corporation,  joint 
stock  company  or  association  organized  for  profit,  and  hav- 
ing a  capital  stock  represented  by  shares,  unless  otherwise 
expressly  stated."  These  terms  were  copied  from  the  provi- 
sions of  the  corporation  excise  tax  law  of  1909.  And  under 
that  statute  it  was  ruled  that  mutual  savings  banks,  such  as 
may  be  organized  under  the  laws  of  some  of  the  states,  were 
not  subject  to  the  tax.  Such  banks  receive  deposits,  invest 
the  money  deposited,  and  divide  the  profits  among  the  de- 
positors. But  they  have  no  capital  stock,  and  the  depositors 
are  not  stockholders.  And  though  they  are  in  a  certain  sense 
organized  for  profit,  yet  their  organization  and  the  transac- 
tion of  their  business  are  not  for  the  profit  of  those  who 
constitute  the  managing  body,  except  in  so  far  as  they  may 
also  be  depositors.59  And  such  banks  are  expressly  except- 
ed  from  taxability  under  the  act  of  Congress  of  1913. 

§  70.     Public  Service  Corporations 

The  various  kinds  of  corporations  now  commonly  classed 
under  this  designation  are  not  exempt  from  the  income  tax 
unless  specially  released  from  it  by  statute.  The  attempt 
was  made  to  withdraw  them  from  the  operation  of  the  cor- 
poration tax  law  of  1909,  on  the  ground  that  they  exercised 
a  delegated  authority  from  the  states  which  created  them  and 
bore  such  a  relation  to  the  general  public  as  to  make  their 
functions  quasi-governmental  in  character.  But  the  Supreme 
Court  of  the  United  States  ruled  otherwise,  saying :  "In  the 

5»  28  Opin.  Atty.  Gen.  p.  189,  citing  Huntington  v.  Savings  Bank, 
96  U.  S.  388,  24  L.  Ed.  777 :  Hannon  v.  Williams,  34  N.  J.  Eq.  255 ; 
Savings  Bank  v.  Town  of  New  London,  20  Conn.  111. 

(148) 


Ch.  6)    PERSONS  AND  CORPORATIONS  SUBJECT  TO  TAX    §  70 

case  of  South  Carolina  v.  United  States, 60  this  court  held  that 
when  a  state,  acting  within  its  lawful  authority,  undertook  to 
carry  on  the  liquor  business,  it  did  not  withdraw  the  agencies 
of  the  state,  carrying  on  the  traffic,  from  the  operation  of  the 
internal  revenue  laws  of  the  United  States.  If  a  state  may 
not  thus  withdraw  from  the  operation  of  a  federal  taxing  law 
a  subject-matter  of  such  taxation,  it  is  difficult  to  see  how  the 
incorporation  of  companies  whose  service,  though  of  a  public 
nature,  is  nevertheless  with  a  view  to  private  profit,  can  have 
the  effect  of  denying  the  federal  right  to  reach  such  properties 
and  activities  for  the  purposes  of  revenue.  It  is  no  part  of 
the  essential  governmental  functions  of  a  state  to  provide 
means  of  transportation,  supply  artificial  light,  water,  and  the 
like.  These  objects  are  often  accomplished  through  the 
medium  of  private  corporations,  and  though  the  public  may 
derive  a  benefit  from  such  operations,  the  companies  carrying 
on  such  enterprises  are  nevertheless  private  companies,  whose 
business  is  prosecuted  for  private  emolument  and  advantage. 
For  the  purpose  of  taxation,  they  stand  upon  the  same  foot- 
ing as  other  private  corporations  upon  which  special  fran- 
chises have  been  conferred.  The  true  distinction  is  between 
the  attempted  taxation  of  those  operations  of  the  states  es- 
sential to  the  execution  of  their  governmental  functions,  and 
which  the  state  can  only  do  itself,  and  those  activities  which 
are  of  a  private  character.  The  former  the  United  States 
may  not  interfere  with  by  taxing  the  agencies  of  the  state 
in  carrying  out  its  purposes;  the  latter,  although  regulated 
by  the  state,  and  exercising  delegated  authority,  such  as  the 
right  of  eminent  domain,  are  not  removed  from  the  field  of 
legitimate  federal  taxation."  61 

The  Wisconsin  income  tax  law,  however,  explicitly  exempts 


so  199  TJ.  S.  437,  26  Sup.  Ct.  110,  50  L.  Ed.  261,  4  Am.  &  Eng.  Ann. 
Cas.  737. 

«i  Flint  v.  Stone  Tracy  Co.,  220  U.  S.  107,  31  Sup.  Ct  342,  55  L. 
Ed.  389. 

(149) 


§  71  INCOME   TAXATION  (Ch.  6 

"incomes  derived  from  property  and  privileges  by  persons 
now  required  by  law  to  pay  taxes  or  license  fees  directly  into 
the  treasury  of  the  state  in  lieu  of  taxes,  and  such  persons 
shall  continue  to  pay  taxes  and  license  fees  as  heretofore." 
And  the  state  tax  commission  rules  that  this  clause  exempts 
from  the  payment  of  the  income  tax  railroad  companies  and 
street  railway  companies,  including,  in  the  latter  case,  con- 
nected electric  light,  heat,  and  power  companies ;  also  palace 
and  sleeping  car  companies,  freight  line  and  equipment  com- 
panies, express  companies,  telegraph  and  telephone  com- 
panies, boom  and  improvement  companies,  plank  road  com- 
panies, fire,  life,  and  accident  insurance  companies  and  surety 
companies,  and  title  guaranty  companies,  but  not  water,  light, 
heat,  and  power  companies  and  other  public  utilities  which 
are  taxable  locally.62 

§  71.     Unincorporated  Associations 

The  federal  income  tax  law,  as  well  as  the  statutes  of  some 
of  the  states,  couple  with  the  word  "corporations,"  in  describ- 
ing those  subject  to  the  tax,  the  term  "joint  stock  companies 
or  associations."  This  term  describes  an  anomalous  kind  of 
body,  a  hybrid  in  the  law,  occupying  a  position  midway  be- 
tween a  corporation  and  a  partnership.  A  joint  stock  com- 
pany or  association  is  a  body  of  persons  united  and  acting 
together  without  a  charter  (or  without  being  incorporated 
under  a  general  law),  but  upon  the  methods  and  forms  used 
by  incorporated  bodies,  for  the  prosecution  of  some  common 
enterprise.  Such  an  association  possesses  a  common  capital 
contributed  by  the  members  composing  it,  such  capital  being 
commonly  divided  into  shares,  of  which  each  member  possess- 
es one  or  more,  and  which  are  transferable  by  the  owner. 
It  usually  transacts  business  under  a  company  name,  by 
which,  under  the  laws  of  some  states,  it  may  sue  and  be  sued, 

«2  Wisconsin  Income  Tax  Law  1911,  edition  published  by  State 
Tax  Commission,  Madison,  Wis.,  p.  21. 

(150) 


Ch.  6)    PERSONS  AND  CORPORATIONS  SUBJECT  TO  TAX    §  71 

and  its  affairs  are  generally  administered  by  a  board  of 
managers  or  directors.  But  it  differs  from  a  corporation 
proper,  both  in  the  fact  that  it  is  not  a  legal  entity  separate 
and  distinct  from  the  members  composing  it,  and  also  in  the 
fact  that  all  the  members  are  personally  liable  for  its  debts.63 
A  company  or  association  of  this  kind  may  be  formed  and 
exist  at  common  law.  But  the  statutory  law  of  some  of  the 
states  (but  not  all)  also  authorizes  the  organization  of  such 
associations,  or  confers  upon  them  more  or  less  of  the  char- 
acteristics and  privileges  of  a  corporation.  In  some  cases 
these  statutes  go  so  far  in  this  direction  that  the_only  prac- 
tical difference  between  a  corporation,  properly  so  called, 
and  a  joint  stock  company  organized  under  the  state  law  is 
that,  in  the  latter  case,  the  stockholders  remain  personally 
liable  for  the  debts.  The  federal  corporation  tax  law  of 
1909  applied  to  "every  corporation,  joint  stock  company  or 
association  organized  for  profit  and  having  a  capital  stock 
represented  by  shares,  organized  under  the  laws  of  the  United 
States  or  of  any  state  or  territory."  And  the  federal  supreme 
court  held  that  real  estate  trusts  created  by  deed,  for  the 
purpose  of  purchasing,  improving,  holding,  or  selling  lands 
and  buildings  for  the  benefit  of  the  shareholders,  which  are 
not  organized  under  any  statute  of  the  state  where  they  are 
formed,  and  do  not  derive  any  benefit  or  privilege  from  any 
such  statute,  and  which  are  not  intended  to  have  perpetual 
duration,  but  are  limited  by  their  terms  to  a  fixed  period, 
were  not  subject  to  the  federal  tax.64  But  it  is  important 
to  notice  that  the  act  of  1913  is  made  applicable  to  "every 

es  See  Allen  v.  Long,  80  Tex.  261,  16  S.  W.  43,  26  Am.  St.  Rep. 
735;  Adams  Express  Co.  v.  Schotield,  111  Ky.  832,  64  S.  W.  903; 
Kossakowskl  v.  People,  177  111.  563,  53  N.  E.  115 ;  Lyon  v.  Denison. 
80  Mich.  371,  45  N.  W.  358,  8  L.  R.  A.  358 ;  Sandford  v.  Board  of 
Sup'rs  of  New  York,  15  How.  Prac.  (N.  Y.)  172;  In  re  Jones,  28 
Misc.  Rep.  (N.  Y.)  356,  59  N.  Y.  Supp.  983;  Lane  v.  Albertson,  78 
App.  Div.  607,  79  N.  Y.  Supp.  947. 

a*  Eliot  v.  Freeman,  220  U.  S.  178,  31  Sup.  Ct  360,  55  L.  Ed.  424. 

(151) 


§  72  INCOME   TAXATION  (Ch.  6 

corporation,  joint  stock  company  or  association  organized 
in  the  United  States,  no  matter  how  created  or  organized." 
In  view  of  the  decision  above  referred  to,  this  change  of  lan- 
guage must  be  considered  highly  significant,  and  manifests 
an  intention  on  the  part  of  Congress  to  apply  the  tax  to  all 
kinds  of  joint  stock  companies  or  associations,  whether  or- 
ganized in  accordance  with  the  law  of  any  given  state  or 
merely  with  such  powers  and  characteristics  as  they  may 
possess  at  common  law. 

§  72.     Incorporated  Clubs 

An  incorporated  club,  organized  for  social  purposes  or  for 
sport,  and  not  eleemosynary  or  educational  in  character  nor 
in  the  nature  of  a  benefit  or  insurance  society,  is  apparently 
subject  to  the  payment  of  the  income  tax  imposed  by  the  act 
of  Congress  of  1913,  if  it  derives  a  revenue  from  membrship 
dues,  rent  of  rooms,  profits  of  restaurant  or  bar,  etc.,  and 
has  any  net  income  after  paying  expenses  and  deducting  the 
other  items  allowed  by  the  statute.  For  it  must  be  observed 
that  the  act  in  question  does  not  require  that  a  corporation, 
to  be  taxable,  should  be  "organized  for  profit"  or  have  "a 
capital  stock  represented  by  shares,"  as  was  the  case  in  earlier 
statutes,  but  only  (with  reference  to  domestic  corporations) 
that  it  should  be  "organized  within  the  United  States."  And 
the  provision  exempting  certain  kinds  of  corporations  specifi- 
cally enumerates  and  describes  those  which  Congress  intended 
to  release  from  the  tax,  from  which  it  follows,  by  a  well- 
known  rule  of  statutory  construction,  that  no  other  exceptions 
can  be  implied.  A  similar  rule  prevails  in  England.  Thus, 
where  a  golf  club  (an  ordinary  bona  fide  members'  club)  al- 
lowed members  to  introduce  visitors  and  the  visitors  to  play 
golf  on  its  links,  but  such  visitors  paid  "green  fees"  for  the 
privilege,  and  the  fees  so  collected  amounted  to  a  consider- 
able sum  every  year,  it  was  held  that  the  club  was  carrying 
on  an  enterprise  which  was  beyond  the  scope  of  the  ordinary 
(152) 


Ch.  6)    PERSONS  AND  CORPORATIONS  SUBJECT  TO  TAX    §  73 

functions  of  a  club,  and  as  to  which  it  was  possible  to  keep 
separate  accounts,  so  as  to  ascertain  what  profits  it  was  mak- 
ing, if  any,  and  therefore  such  profits  were  liable  to  assess- 
ment for  the  income  tax.65  And  in  another  case,  where  a 
society  formed  for  the  improvement,  spiritual,  mental,  so- 
cial, and  physical,  of  young  men,  carried  on  a  restaurant,  as 
well  as  educational  classes,  a  gymnasium,  and  a  publication 
department,  the  restaurant  being  conducted  on  the  usual 
commercial  principles  and  being  open  to  the  public,  it  was 
held  that  the  association  was  liable  to  pay  the  income  tax  on 
the  profits  made  by  the  restaurant.68 

But  such  clubs  are  not  subject  to  taxation  under  the  stat- 
ute in  Wisconsin,  which  describes,  as  subject  to  the  tax,  cor- 
porations "organized  for  profit  and  having  a  capital  stock 
represented  by  shares,"  and  which  also  specifically  exempts  any 
"association  of  individuals  not  organized  or  conducted  for 
pecuniary  profits."  So  also  in  Hawaii,  where  corporations 
are  taxed  only  when  "doing  business  for  profit  in  the  terri- 
tory." 

§  73.     Inactive  Corporations  and  Holding  Companies 

The  federal  corporation  tax  law  of  1909  imposed  a  tax  on 
all  corporations  organized  for  profit  and  having  a  capital 
stock  represented  by  shares,  and  the  tax  was  levied  "with 
respect  to  the  carrying  on  or  doing  business"  by  such  cor- 
porations. It  was  held  that  a  corporation,  to  be  subject  to 
the  tax,  must  not  only  be  organized  for  the  purpose  of  doing 
business,  but  must  also  be  actually  engaged  in  that  business. 
Hence  a  corporation  organized  solely  for  the  purpose  of  tak- 
ing over  and  holding  the  real  estate  and  leasehold  interests 
owned  by  a  mercantile  company,  leasing  such  property  to 
the  company,  collecting  the  rents  and  distributing  them  among 

« 5  Carlisle  &  S.  Golf  Club  v.  Smith  [1912]  2  K.  B.  177. 
66  Grove  v.  Young  Men's  Christian  Ass'n,  88  Law  T.  696,  4  Tax 
Cas.  613. 

(153) 


§  73  INCOME    TAXATION  (Ch.  6 

its  stockholders,  and  which  had  actually  executed  a  long  term 
lease  of  such  property  to  the  mercantile  company  and  sur- 
rendered the  management  and  control  thereof,  was  held  not 
subject  to  the  tax,  although  it  was  organized  under  a  provi- 
sion of  law  relative  to  the  organization  of  business  and  man- 
ufacturing corporations  for  profit,  since,  even  though  a  cor- 
poration be  deemed  to  have  been  organized  for  business  pur- 
poses, it  was  not  subject  to  the  tax  if  it  abstained  from  doing 
business.07  On  the  same  principle,  a  corporation  organized 
for  the  purpose  of  owning  and  renting  an  office  building,  but 
which  had  wholly  parted  with  the  management  and  control 
of  the  property,  and  by  the  terms  of  a  reorganization  had 
disqualified  itself  from  any  activity  in  respect  to  it,  its  sole 
authority  being  to  hold  the  title  subject  to  a  lease  for  130 
years,  and  to  receive  and  distribute  the  rentals  which  might 
accrue  under  the  terms  of  the  lease,  or  the  proceeds  of  any 
sale  of  the  land,  if  it  should  be  sold,  was  held  not  subject  to 
the  tax,  because  not  doing  business  within  the  meaning  of 
the  law.68  So  also,  a  railroad  company  which  had  leased  its 
entire  road  and  all  its  rights  and  privileges  for  a  term  of 
years  at  an  annual  rental,  the  lessees  operating  the  road  and 
agreeing  to  return  it  at  the  expiration  of  the  lease,  was  held 
not  to  be  "engaged  in  business"  with  respect  to  the  road, 
within  the  meaning  of  the  statute,  although  it  retained  a 
franchise  of  corporate  existence,  and  was  ready  to  resume 
possession  at  the  expiration  of  the  lease,  and  to  exercise  its 
franchise  of  eminent  domain  when  required  by  the  lessee. 
Also  it  was  held  in  the  same  case  that  the  receipt  by  a  lessor 
railroad  of  the  income  from  its  road  and  of  interest  and  divi- 
dends from  invested  funds,  and  the  payment  of  expenses 
incidental  to  the  receipt  of  such  moneys  and  their  distribution 
among  stockholders,  did  not  constitute  a  business  taxable 

67  Emery,  Bird,  Thayer  Realty  Co.  v.  United  States,  198  Fed.  242. 

es  Zonne  v.  Minneapolis  Syndicate,  220  TJ.  S.  187,  31  Sup.  Ct  361, 

55  L.  Ed.  428.    And  see  Abrast  Realty  Co.  v.  Maxwell,  206  Fed.  333. 

(154) 


Ch.  6)    PERSONS  AND  CORPORATIONS  SUBJECT  TO  TAX    §  73 

under  the  federal  statute.69  And  it  was  ruled  by  the  treasury 
department  that  so-called  "holding  companies,"  which  do  not 
transact  any  business  of  their  own,  but  merely  receive  and 
disburse  the  dividends  on  the  stock  which  they  own  in  the 
constituent  companies,  were  not  subject  to  the  tax.70 

But  in  this  particular,  the  act  of  Congress  of  1913  differs 
widely  from  that  of  1909.  It  does  not  lay  the  tax  on  the 
transaction  of  corporate  business  or  on  the  privilege  of  doing 
business  in  a  corporate  capacity,  but  on  the  income  of  the 
corporation.  As  to  domestic  corporations,  it  does  not  require 
that  they  should  be  organized  for  profit  or  for  business,  nor 
that  they  should  be  engaged  in  business,  but  only  that  they 
should  have  a  net  income.  And  as  to  that  income,  the  tax 
is  not  laid  on  income  derived  from  business,  but  on  "income 
received  from  all  sources."  These  changes  are  too  signifi- 
cant to  have  been  made  without  intention.  And  since  the  de- 
cisions of  the  Supreme  Court  above  referred  to  must  have  been 
within  the  cognizance  of  Congress  in  enacting  the  statute, 
there  is  a  very  strong  presumption  that  the  law  as  now  framed 
was  meant  to  include  holding  companies  and  inactive  corpo- 
rations, provided  only  that  they  are  in  receipt  of  an  income 
over  and  above  expenses  and  the  proper  deductions. 

And  it  is  further  to  be  noted  that  the  present  act  of  Con- 
gress makes  a  very  significant  mention  of  holding  companies 
in  the  provision  relating  to  the  taxation  of  accumulated  earn- 
ings or  undivided  profits  as  part  of  the  income  of  the  stock- 
holder. (Subsection  A,  subdivision  2.)  The  share  to  which 
the  individual  stockholder  would  be  entitled,  if  such  earnings 
or  profits  were  divided,  is  taxable  to  him  as  income,  though 
no  division  or  distribution  is  made,  in  case  the  company  was 
"formed  or  fraudulently  availed  of"  for  the  purpose  of  es- 

6»  McCoach  v.  Minehill  &  S.  H.  R.  Co.,  228  U.  S.  295,  33  Sup.  Ct 

419,  57  L.  Ed.  ,  affirming  Minehill  &  S.  H.  R.  Co.  v.  McCoach, 

192  Fed.  670. 

TO  Treasury  Decisions,  No.  1742,  par.  18. 

(155) 


§  74  INCOME   TAXATION  (Ch.  6 

caping  the  tax.  And  the  fact  that  it  is  "a  mere  holding  com- 
pany" is  made  prima  facie  evidence  of  such  fraudulent  pur- 
pose. 

§  74.     Corporations  of  Philippines,  and  Porto  Rico 

The  corporation  tax  law  of  1909  applied  to  corporations 
"organized  under  the  laws  of  the  United  States  or  of  any 
state  or  territory  of  the  United  States"  or  "organized  under 
the  laws  of  any  foreign  country  and  engaged  in  business  in 
any  state  or  territory  of  the  United  States."  And  an  opinion 
was  rendered  by  the  Attorney  General  that,  as  the  Philippine 
Islands  are  not  a  state  or  territory  of  the  United  States,  and 
not,  on  the  other  hand,  a  "foreign  country,"  a  corporation 
created  by  the  government  of  the  Islands  would  not  be  subject 
to  the  corporation  tax  at  all.  So  also,  he  ruled,  a  corporation 
"organized  under  the  laws  of  a  foreign  country"  would  not 
be  subject  to  the  income  tax  with  respect  to  its  business  done 
in  the  Philippines,  because  such  business  is  not  done  "within 
the  United  States  or  its  territories."  But  a  corporation  or- 
ganized under  the  laws  of  one  of  the  states,  and  doing  busi- 
ness wholly  within  the  Philippines,  and  operating  under  a 
concessionary  contract  granted  by  the  Philippine  legislature, 
would  be  liable  to  the  tax.  "The  resulting  discrimination 
against  American,  and  in  favor  of  foreign,  corporations  as 
to  business  carried  on  in  the  Philippines  and  Porto  Rico  can- 
not serve  to  alter  the  construction  of  the  act,  although  it  may 
invite  to  amendment."  71  And  the  officers  of  the  treasury 
department  ruled  that  companies  organized  in  Porto  Rico 
and  not  engaged  in  business  in  the  United  States  were  not 
subject  to  the  tax.72  But  this  also  has  been  changed  by  the 
act  of  Congress  of  1913,  by  the  provision  that  "the  provisions 
of  this  section  shall  extend  to  Porto  Rico  and  the  Philippine 
Islands;  Provided,  that  the  administration  of  the  law  and 

TI  29  Opin.  Atty.  Gen.  p.  164. 

72  Treasury  Decisions,  No.  1742,  par.  22. 

(156) 


Ch.  6)    PERSONS  AND  CORPORATIONS  SUBJECT  TO  TAX    §  75 

the  collection  of  the  taxes  imposed  in  Porto  Rico  and  the 
Philippine  Islands  shall  be  by  the  appropriate  internal-reve- 
nue officers  of  those  governments,  and  all  revenues  collected 
in  Porto  Rico  and  the  Philippine  Islands  thereunder  shall 
accrue  intact  to  the  general  governments  thereof,  respectively." 

§  75.     Insurance  Companies 

The  act  of  Congress  of  1913  expressly  applies  to  "every 
insurance  company"  organized  in  the  United  States,  or  organ- 
ized under  the  laws  of  a  foreign  country  and  doing  business 
in  the  United  States.  But  as  to  mutual  insurance  companies, 
special  rules  are  provided  for  ascertaining  their  taxable  net 
income.  In  the  case  of  mutual  life  insurance  companies,  it  is 
enacted  that  they  "shall  not  include  as  income  in  any  year  such 
portion  of  any  actual  premium  received  from  any  individual 
policy  holder  as  shall  have  been  paid  back  or  credited  to  such 
individual  policy  holder,  or  treated  as  an  abatement  of  pre- 
mium of  such  individual  policy  holder,  within  such  year." 
This  provision  was  doubtless  inserted  in  the  act  in  view  of  the 
decisions  which  had  been  made  on  this  point  under  the  cor- 
poration excise  tax  law  of  1909.  That  statute  allowed  insur- 
ance companies  to  deduct  from  their  returns  of  income  for 
taxation  "sums  other  than  dividends  paid  within  the  year  on 
policy  and  annuity  contracts."  And  it  was  held  that  the  word 
"dividends"  was  here  used  in  its  popular  sense  as  represent- 
ing profits,  and  that  so-called  dividends  of  a  mutual  com- 
pany doing  business  on  the  level  premium  plan,  consisting 
merely  of  the  portion  of  the  loading  of  the  premium  charged 
in  excess  of  the  cost  of  insurance  and  returned  annually  to 
the  policy  holders  after  the  first  year,  so  far  as  the  same  were 
used  to  reduce  subsequent  premiums,  were  not  income  re- 
ceived and  not  subject  to  the  tax.  At  the  same  time  it  was 
held  that  this  rule  does  not  apply  to  a  dividend  declared  in 
the  case  of  a  full-paid  participating  policy,  wherein  the  policy 
holder  has  no  further  premium  payments  to  make,  which  divi- 

(157) 


§  75  INCOME    TAXATION  (Ch.  6 

dend  constitutes  a  participation  in  the  profits  and  income  of 
the  invested  funds  of  the  company.73 

In  the  case  of  mutual  fire  insurance  companies  "requiring 
their  members  to  make  premium  deposits  to  provide  for  losses 
and  expenses,"  it  is  provided  that  they  "shall  not  return  as 
income  any  portion  of  the  premium  deposits  returned  to  their 
policy  holders,  but  shall  return  as  taxable  income  all  income 
received  by  them  from  all  other  sources  plus  such  portions 
of  the  premium  deposits  as  are  retained  by  the  companies 
for  purposes  other  than  the  payment  of  losses  and  expenses 
and  reinsurance  reserves."  And  in  the  case  of  mutual  ma- 
rine insurance  companies,  they  "shall  include  in  their  return 
of  gross  income  gross  premiums  collected  and  received  by 
them  less  amounts  paid  for  reinsurance,  but  shall  be  entitled 
to  include  in  deductions  from  gross  income  amounts  repaid 
to  policy  holders  on  account  of  premiums  previously  paid  by 
them  and  interest  paid  upon  such  amounts  between  the  ascer- 
tainment thereof  and  the  payment  thereof." 

73  Mutual  Benefit  Life  Ins.  Co.  v.  Herold,  198  Fed.  199,  affirmed, 
201  Fed.  918.  And  see  New  York  Life  Ins.  Co.  v.  Styles,  L.  R.  14 
App.  Cas.  381,  59  Law  J.  Q.  B.  291.  But  compare  Last  v.  London 
Assur.  Corp.,  L.  R.  10  App.  Cas.  438.  In  the  latter  case  it  appeared 
that  a  life  insurance  company  issued  "participating  policies"  at  an 
increased  premium,  according  to  the  terms  of  which,  at  the  end  of 
each  five  year  period,  the  gross  profits  of  such  policies  were  dealt 
with  as  follows:  Two- thirds  were  returned  by  way  of  bonus  of  abate- 
ment of  premiums  to  the  holders  of  such  policies  then  in  force,  and 
the  remaining  one-third  went  to  the  company,  which  bore  the  whole 
expense  of  the  business,  the  portion  remaining  after  payment  of  ex- 
penses constituting  the  only  profit  available  for  dividends  among  the 
shareholders.  It  was  held  that  the  two-thirds  returned  to  policy 
holders  were  "annual  profits  or  gains"  and  assessable  for  the  income 
tax. 

(158) 


Ch.  7)  EXEMPTIONS   AND    EXCEPTIONS  §  76 

CHAPTER  VII 

EXEMPTIONS  AND  EXCEPTIONS 

§  76.  Revenues  of  United  States. 

77.  States  and  Municipal  Corporations. 

78.  Agricultural  and  Horticultural  Organizations. 

79.  Labor  Organizations. 

80.  Fraternal  Orders  and  Benefit  Societies. 

81.  Religious,  Charitable,  and  Benevolent  Associations. 

82.  Educational  and  Scientific  Institutions. 

83.  Building  and  Loan  Associations. 

84.  Savings  Institutions. 

85.  Civic  Organizations  and  Chambers  of  Commerce. 

86.  Income  from  Property  Otherwise  Taxed. 

87.  Proceeds  of  Life  Insurance  Policies. 

88.  Exemption  of  Fixed  Amount  of  Income. 

§  76.     Revenues  of  United  States 

The  legislature  of  Wisconsin,  in  enacting  the  income  tax 
law  of  that  state,  in  1911,  was  at  pains  to  exempt  from  taxa- 
tion under  the  statute  "income  received  by  the  United 
States."  But  a  similar  exception  would  be  necessarily  im- 
plied in  any  tax  law  of  any  state.  In  the  federal  income  tax 
law  of  1913  the  precise  point  is  not  covered,  but  it  is  a  fixed 
principle  of  statutory  construction  that  the  sovereign  or  gov- 
ernment is  never  included  within  the  scope  of  a  statute  im- 
posing taxes  unless  expressly  named.  Besides,  the  govern- 
ment of  the  United  States  could  not  properly  be  described  as 
a  "person,"  a  "citizen  of  the  United  States,"  or  a  "corpora- 
tion, joint  stock  company  or  association."  This  point  might 
be  of  practical  importance  in  its  application  to  the  case  of  a 
federal  officer  receiving  fees  for  services  or  a  postmaster 
taking  in  money  from  the  sale  of  stamps.  If  the  receipts  of 
the  office  (or  fees)  constitute  the  officer's  compensation,  they 
are  a  part  of  his  private  income,  and  may  be  taxable ;  but  if 
he  is  paid  a  salary  and  required  to  turn  in  the  fees  or  re- 

(159) 


§  77  INCOME   TAXATION  (Ch.  7 

ceipts  of  his  office  to  the  treasury,  such  moneys  are  public 
revenues  and  not  taxable.1 

§  77.     States  and  Municipal  Corporations 

It  is  not  within  the  constitutional  authority  of  Congress 
to  lay  the  burden  of  federal  taxation  upon  the  revenues  of 
a  state  or  a  municipal  corporation,  at  least  in  so  far  as  the 
same  are  raised  by  the  ordinary  methods  of  state  and  local 
taxation,  or  accrue  from  property  owned  or  money  invested 
by  a  state.  Thus,  it  has  been  held  that  the  word  "corpora- 
tion," in  an  internal  revenue  law,  does  not  include  a  state, 
so  that  a  railroad  wholly  owned  by  a  state,  managed  by 
state  agents,  and  the  profits  of  which  form  a  part  of  the 
revenue  of  the  state,  is  not  liable  to  taxation  under  such 
law.2  So  also,  a  municipal  corporation  is,  at  least  in  its  po- 
litical aspects,  a  portion  of  the  sovereign  power  of  the  state, 
or  a  depository  thereof,  and  therefore  is  not  subject  to  taxa- 
tion by  Congress  upon  its  municipal  revenues.3  But  the  ex- 
emption of  a  state  from  taxation  extends  no  further  than  the 
functions  belonging  to  a  state  in  its  ordinary  capacity,  the 
exemption  of  sovereignty  being  limited  by  the  attributes  of 
sovereignty.  Hence  if  a  state  unites  in  one  undertaking  an 
exercise  of  the  police  power  with  a  commercial  business, — 
as  in  the  case  of  the  South  Carolina  dispensary  law,  where 
regulation  of  the  sale  of  intoxicating  liquors  was  effected  by 
the  state  itself  engaging  in  the  business  and  monopolizing 
the  traffic, — the  United  States  cannot  be  compelled  to  aid 
the  operation  of  the  police  power  by  foregoing  its  right  to 
lay  an  impost  or  excise  tax  on  the  business  part  of  the  trans- 
action. And  hence,  the  agents  of  the  state  government  em- 
ployed in  the  operation  of  the  dispensary  law  were  held  lia- 

1  Supra,  §  64. 

2  Georgia  v.  Atkins,  35  Ga.  315,  1  Abb.  U.  S.  22,  Fed.  Gas.  No. 
5,350. 

s  United  States  v.  Baltimore  &  O.  R.  Co.,  17  Wall.  322,  21  L.  Ed. 
597. 

(160) 


Ch.  7)  EXEMPTIONS   AND    EXCEPTIONS  §  77 

ble  to  pay  the  internal  revenue  tax  imposed  by  the  act  of 
Congress.4  And  the  Supreme  Court  of  the  United  States 
has  also  ruled  that  a  municipal  corporation  engaged  in  the 
business  of  distilling  spirits  is  subject  to  internal  revenue 
taxation  under  the  laws  of  the  United  States,  whether  its  acts 
in  that  respect  are  or  are  not  ultra  vires.5  It  was  probably 
with  a  view  to  just  such  cases  as  these  that  Congress,  in  the 
income  tax  law  of  1913,  has  expressly  disclaimed  the  inten- 
tion to  apply  the  statute  to  the  revenues  of  states  or  munici- 
pal corporations.  (Subsection  G,  clause  "a,"  at  the  end. 
See  Appendix.) 

It  is  undoubtedly  within  the  power  of  a  state  to  tax  the 
revenues  of  its  own  municipal  corporations  if  it  shall  see  fit 
to  do  so.  And  so  far  as  concerns  income  taxation,  the  prin- 
ciple appears  to  be  that  profits  derived  by  a  municipality  from 
anything  outside  the  scope  of  its  ordinary  and  necessary 
municipal  functions,  and  in  the  nature  of  a  business  enter- 
prise, will  be  subject  to  the  income  tax.  Thus,  in  England, 
a  municipal  corporation  owning  and  operating  its  own  sys- 
tem of  waterworks,  for  distribution  to  its  inhabitants,  is  held 
not  taxable  on  the  income  derived  therefrom,6  but  it  is  liable 
to  assessment  in  respect  to  surplus  revenue  derived  from 
supplying  water  beyond  the  area  of  compulsory  supply  and 
from  the  sale  of  water  for  the  purposes  of  trade  or  manu- 
facture.7 So  also,  a  municipal  corporation  is  subject  to 
taxation  upon  profits  derived  from  the  maintenance  of  a 
market  or  a  market  hall.8  And  in  a  case  where  a  quasi-mu- 

*  South  Carolina  v.  United  States,  199  U.  S.  437,  26  Sup.  Ct  110, 
50  L.  Ed.  261,  4  Am.  &  Eng.  Ann.  Gas.  737. 

s  Salt  Lake  City  v.  Hollister,  118  U.  S.  256,  6  Sup.  Ct.  1055,  30  L. 
Ed.  176. 

o  In  re  Glasgow  Corp.  Waterworks,  12  Scotch  Law  Rep.  466,  1  Tax 
Cas.  28. 

7  Glasgow  Corp.  Water  Com'rs  v.  Miller,  23  Scotch  Law  Rep.  285, 
2  Tax  Cas.  131. 

s  In  re  Birmingham  Corp.,  1  Tax  Cas.  26 ;  Attorney  General  v. 
Scott,  28  Law  T.  302,  1  Tax  Cas/55. 

BL.INC.TAX.— 11  (161) 


§  77  INCOME   TAXATION  (Ch.  7 

nicipal  corporation  had  constructed  and  was  maintaining  a 
sewer,  the  funds  being  raised  by  a  public  loan  repayable  in 
annual  installments,  and  the  money  for  such  repayment  was 
found  partly  by  contributions  levied  from  neighboring  dis- 
trict councils,  whose  sewage  went  through  the  sewer,  and 
partly  from  rates,  and  this  was  the  only  income,  it  was  held 
nevertheless  that  the  corporation  was  liable  to  the  income 
tax.8  It  was  ruled  by  the  officers  of  the  treasury  depart- 
ment that  a  municipal  corporation  which  owns  and  operates 
its  own  waterworks,  or  a  plant  for  the  production  and  dis- 
tribution of  gas  or  electric  light  to  its  citizens,  was  not  sub- 
ject to  the  corporation  tax  under  the  act  of  Congress  of 
1909,  although  it  makes  and  collects  fixed  charges  for  the 
service  so  rendered  and  derives  a  profit  therefrom.  But 
this  was  on  the  explicit  ground  that  a  municipality  is  not  a 
corporation  "organized  for  profit"  or  one  "having  a  capital 
stock  represented  by  shares,"  within  the  language  of  that 
statute.10  Such  questions  are  by  no  means  free  from  doubt. 
But  they  are  not  of  great  practical  importance  at  the  present 
time,  since  the  modern  income  tax  laws  generally  exclude 
municipal  corporations,  either  expressly  or  by  the  use  of 
language  which  cannot  be  held  to  include  them.  Thus  in 
Wisconsin,  the  statute  exempts  "income  received  by  the 
state  and  all  counties,  cities,  villages,  school  districts,  or  oth- 
er political  units  of  this  state."  In  South  Carolina,  the  stat- 
ute is  made  applicable  to  "persons"  and  "citizens  o!  the 
state,"  but  expressly  excludes  all  corporations.  In  Hawaii, 
the  phrase  employed  is  more  ambiguous ;  but  a  municipality 
could  hardly  be  described  as  a  "corporation  doing  business 
for  profit  within  the  territory." 

9  Ystradyfodwg  &  Pontypridd  Main   Sewerage  Board  v.  Bensted 
[1907]  App.  Cas.  264. 

10  Treasury  Decisions,  No.  1634. 

(162) 


Ch.  7)  EXEMPTIONS   AND    EXCEPTIONS  §  78 

§  78.     Agricultural  and  Horticultural  Organizations 

Following  the  language  of  the  act  of  1909,  the  income  tax 
law  of  1913  specifically  exempts  from  its  operation  "agri- 
cultural or  horticultural  organizations."  The  phrase  has 
not  been  judicially  construed  by  the  courts,  but  several  rul- 
ings of  the  treasury  department  have  indicated  its  meaning, 
as  viewed  by  the  officers  charged  with  the  administration  of 
the  law.  Agricultural  organizations,  it  was  ruled,  do  not 
come  within  the  statutory  exemption,  unless  their  chief  ob- 
ject is  the  promotion  or  advancement  of  agricultural  in- 
terests, and  no  part  of  the  income  inures  to  the  benefit  of 
their  stockholders.  "A  corporation  engaged  in  agricultural, 
horticultural,  or  similar  pursuits,  evidently  for  profit,  is  not, 
within  the  meaning  of  the  law,  such  an  agricultural  or  hor- 
ticultural association  as  is  specifically  enumerated  as  exempt 
from  the  requirements  of  the  act  cited.  Corporations,  to 
come  within  the  exempted  class,  must  be  such  associations 
as,  by  means  of  exhibits,  contests,  awards,  and  premiums,  are 
designed  to  encourage  better  production  of  agricultural  or 
horticultural  products,  not  themselves  engaged  in  agricul- 
tural or  horticultural  pursuits,  such  as  county  fairs  and  like 
organizations  of  a  quasi  public  character,  whose  income, 
derived  from  gate  receipts,  entry  fees,  donations,  etc.,  is  used 
to  meet  the  necessary  expenses  of  the  association, 'the  pay- 
ment of  premiums,  making  improvements,  etc.,  no  part  of 
which  income  inures  to  the  benefit  of  any  private  stockhold- 
er or  individual.  A  corporation  engaged  in  the  business  of 
raising  stock  or  poultry,  or  growing  grain,  fruits,  or  other 
products  of  this  character,  is  an  agricultural  or  horticultural 
society  only  in  the  sense  that  it  indicates  the  kind  of  busi- 
ness in  which  it  is  engaged.  If  the  business  of  the  corpora- 
tion so  engaged  is  so  carried  on  that  its  income  inures  or 
may  inure  to  the  benefit  of  its  stockholders,  it  will  be  held  to 
be  a  corporation  organized  for  profit,  and,  regardless  of  the 
fact  that  it  may  be  engaged  in  agricultural  or  horticultural 

(163) 


§  79  INCOME   TAXATION  (Ch.  7 

pursuits,  it  must  make  returns  of  annual  net  income  for  each 
calendar  year,  and  pay  any  special  excise  tax  to  which  such 
returns  may  show  it  to  be  liable."  X1  Thus,  fruit  growers' 
associations  whose  purpose  is  to  promote  the  mutual  benefit 
of  their  members  in  growing,  harvesting,  and  marketing 
their  products,  and  which  are  not  organized  for  profit  and 
have  no  capital  stock  represented  by  shares,  and  whose  in- 
come is  derived  wholly  from  membership  fees,  dues,  and  as- 
sessments to  meet  necessary  expenses,  are  not  liable  to  the 
tax.12  But  on  the  other  hand,  corporations  owning  sugar  or 
other  plantations  and  disposing  of  the  products  thereof,  are 
not  entitled  to  the  exemption  simply  in  view  of  the  nature 
of  their  business.13  And  corporations  engaged  in  growing 
fruits,  vegetables,  and  like  products  for  profit,  and  which 
distribute  such  profits  among  their  members  on  the  basis  of 
the  capital  invested,  are  liable  to  the  statute,  and  must  make 
returns  and  pay  the  taxes  if  any  are  found  to  be  due.14 

§  79.     Labor  Organizations 

A  specific  exemption  is  made  in  the  federal  income  tax 
law  in  favor  of  "labor  organizations."  This  phrase  is  not 
elsewhere  defined  in  the  act,  but  the  intention  of  Congress 
in  this  behalf  is  plainly  indicated  by  the  events  of  political 
history  and  the  trend  of  legislation  in  recent  years.  The 
term  "labor,"  as  here  used,  evidently  cannot  be  taken  in  the 
rather  wide  sense  given  to  it  in  some  other  phrases  familiar 
in  the  law,  such  as  "work  and  labor,"  "common  labor," 
"worldly  labor,"  and  the  like.  But  the  organizations  refer- 
red to  are  those  associations  of  mechanics  and  artisans,  and 
even  of  unskilled  laborers,  which  are  formed  for  the  pur- 
pose of  the  mutual  advantage  and  protection  of  their  mem- 

11  Treasury  Decisions,  No.  1737. 

12  Treasury  Decisions,  No.  1742,  par.  29. 
is  Treasury  Decisions,  No.  1742,  par.  23. 
i*  Treasury  Decisions,  No.  1742,  par.  30. 

(164) 


Ch.  7)  EXEMPTIONS   AND    EXCEPTIONS  §  80 

bers,  for  enforcing  the  regulations  which  they  prescribe 
with  reference  to  the  conditions  and  hours  of  labor  and  the 
rate  of  wages,  and  other  such  objects,  and  which  are  com- 
monly called  "trades  unions"  or  "brotherhoods,"  "federa- 
tions," "guilds,"  or  "unions"  of  the  mechanics  employed  in 
any  given  trade  or  craft.  Though  such  associations  "are 
not  explicitly  exempted  in  the  income  tax  laws  of  the  states, 
they  do  not  ordinarily  come  within  the  definition  of  the 
kinds  of  corporations  which  shall  be  taxable,  or  else  they 
fall  within  the  terms  of  a  general  exempting  clause,  as  in 
Wisconsin,  where  the  statute  exempts  "associations  of  in- 
dividuals not  organized  or  conducted  for  pecuniary  profit." 

§  80.     Fraternal  Orders  and  Benefit  Societies 

There  is  also  a  specific  exemption  in  the  act  of  Congress 
in  favor  of  "fraternal  and  beneficiary  societies,  orders,  or 
associations  operating  under  the  lodge  system,  and  provid- 
ing for  the  payment  of  life,  sick,  accident,  and  other  benefits 
to  the  members  of  such  associations  and  dependents  of  such 
members."  As  here  used,  the  word  "lodge"  means  the  meet- 
ing place  (and  hence  the  meeting  itself  or  the  aggregate  of 
the  members)  of  a  secret  society  or  fraternity.15  Such  bod- 
ies are  very  numerous  in  the  United  States,  and  for  the  most 
part  they  combine  with  their  social,  moral,  or  philanthropic 
objects  the  grant  of  pecuniary  relief  to  sick  or  disabled 
members  and  to  the  families  of  deceased  members.  Many 
are  in  fact  but  mutual  insurance  associations,  their  revenues 
being  derived  from  entrance  fees,  membership  dues,  and  oc- 
casional assessments  levied  on  the  members,  and  expended 
(over  and  above  the  cost  of  management  and  other  small 
necessary  expenses)  in  the  payment  of  sick,  accident,  and 
death  benefits.  The  officers  of  the  treasury  department 
have  ruled  that  such  an  association,  if  it  does  not  "oper- 

15  State  v.  Farmers'  &  Mechanics'  Mut  Aid  Ass'n,  35  Kan.  51,  9 
Pac.  956. 

(165) 


§  81  INCOME    TAXATION  (Ch.  7 

ate  under  the  lodge  system,"  is  simply  an  insurance  com- 
pany and  subject  to  the  tax,  notwithstanding  that  all  its 
funds  are  derived  from  membership  fees  and  assessments 
and  expended  in  the  payment  of  such  benefits.16 

§  81.     Religious,  Charitable,  and  Benevolent  Associations 

The  act  of  Congress  also  exempts  "any  corporation  or 
association  organized  and  operated  exclusively  for  reli- 
gious, charitable,  scientific,  or  educational  purposes,  no  part 
of  the  net  income  of  which  inures  to  the  benefit  of  any 
private  stockholder  or  individual."  And  the  statute  of 
Wisconsin  exempts  any  "association  of  individuals"  or- 
ganized for  "religious  or  benevolent"  purposes,  and  not 
"organized  or  conducted  for  pecuniary  profit."  The  rules 
with  reference  to  the  exemption  of  such  associations  from 
the  burdens  of  ordinary  taxation  have  been  well  worked 
out  by  the  courts,  and  will  generally  be  found  applicable 
in  the  case  of  the  special  tax  here  under  consideration. 
Specifically  with  regard  to  the  corporation  excise  tax  of 
1909,  it  was  ruled  that  a  charitable  institution  was  exempt 
whether  it  was  supported  by  voluntary  contributions  or  by 
state  appropriations.17  In  England,  the  rule  has  been  stat- 
ed that,  in  the  income  tax  law,  the  words  "charitable  pur- 
poses" are  to  be  interpreted,  not  according  to  their  popular 
meaning,  but  according  to  their  technical  legal  significa- 
tion, though  it  was  held  in  the  same  case  that  the  phrase 
would  include  a  home  or  asylum  for  the  maintenance  of 
single  persons  and  widows  belonging  to  the  Moravian 
brotherhood.18  And  it  is  a  general  rule,  in  the  construc- 
tion of  exemptions  from  taxation  that  the  word  "charity" 
is  not  to  be  restricted  to  the  relief  of  the  sick  or  poor,  but 
extends  to  any  form  of  philanthropic  endeavor  or  public 

i  e  Treasury  Decisions,  No.  1738. 

if  Treasury  Decisions,  No.  1742,  par.  4. 

is  Income  Tax  Com'rs  v.  Pemsel  [1891]  App.  Cas.  531,  3  Tax  Gas.  53. 

(166) 


Ch.  7)  EXEMPTIONS   AND    EXCEPTIONS  §  81 

beneficence.19  And  even  under  the  more  restricted  form 
of  exemption  under  the  tax  laws  of  some  of  the  states,  ex- 
tending to  "public"  charities,  or  "institutions  of  purely  pub- 
lic charity,"  it  is  held  that  the  term  "public"  is  not  equiva- 
lent to  "universal."  The  exemption  would  not  apply  to  a 
charity  limited  to  a  certain  class  of  privileged  individuals. 
But  on  the  other  hand,  it  need  not  be  open  to  all  persons 
alike,  for  the  "public"  to  which  it  administers  relief  may  be 
limited  to  the  inhabitants  of  a  given  city  or  other  place,  or 
may  be  restricted  to  the  sufferers  from  particular  diseases 
or  forms  of  need,  or  with  reference  to  nationality,  color,  or 
religious  connections.20  Also  it  is  a  well-recognized  rule 
that  an  institution  such  as  a  hospital  or  asylum  does  not 
lose  its  character  as  a  "charitable  institution"  because  it 
receives  pay  patients,  or  in  other  words  requires  those  of 
sufficient  pecuniary  ability  to  pay  for  the  accommodation 
and  treatment  which  they  receive,  if  the  income  thus  de- 
rived is  not  distributed  among  the  corporators  or  stock- 
holders, but  applied  exclusively  to  the  purposes  of  the  in- 
stitution, and  if,  at  the  same  time,  poor  or  indigent  patients 
are  received  and  treated  without  charge.21  But  an  English 
decision  holds  that  if  a  hospital  takes  paying  patients  at  re- 
munerative prices,  and  applies  its  surplus  income  to  the  ex- 
tension and  improvement  of  the  hospital  buildings,  the  sur- 

i»  See  Gerke  v.  Purcell,  25  Ohio  St.  229;  Cleveland  Library  Ass'n 
v.  Pelton,  36  Ohio  St  253;  State  v.  Academy  of  Science,  13  Mo.  App. 
213 ;  Massachusetts  Society  v.  Boston,  142  Mass.  24,  6  N.  E.  840. 

20  Bangor  v.  Masonic  Lodge,  73  Me.  428;    Burd  Orphan  Asylum 
v.  School  Dist,  90  Pa.  St.  21 ;   Hebrew  Orphan  Asylum  v.  New  York, 
11  Hun  (N.  Y.)  116 ;   Income  Tax  Com'rs  v.  Pemsel  [1891]  App.  Cas. 
531,  3  Tax  Cas.  53 ;    Hastings  v.  Long,  11  Pa.  Dist.  R.  70. 

21  State  v.  Board  of  Assessors,  52  La.  Ann.  223,  26   South.  872; 
Hennepin  County  v.  Brotherhood  of  Gethsemane,  27  Minn.  460,  8 
N.  W.  595,  38  Am.  Rep.  298 ;    Philadelphia  v.  Pennsylvania  Hospital, 
154  Pa.  St.  9,  25  Atl.  1076;    Cawse  v.  Nottingham  Lunatic  Asylum 
[1891]  1  Q.  B.  585,  60  Law  J.  Q.  B.  485;    Blake  v.  London,  18  Q.  B. 
Div.  437.     But  see  Needham  v.  Bowers,  L.  R.  21  Q.  B.  Div.  437,  2 
Tax  Cas.  360. 

(167) 


§82  INCOME    TAXATION  (Ch.  7 

plus  is  profit  and  assessable  for  the  income  tax.22  The 
business  of  maintaining  a  cemetery,  from  which  revenues 
are  derived  in  the  form  of  cash  for  the  sale  of  grave-sites 
or  burial  lots  and  annual  dues  or  assessments  upon  lot- 
owners  for  the  care  of  the  grounds,  is  not  a  charity,  and  a 
corporation  owning  and  conducting  the  cemetery  is  taxable 
on  the  income  derived  from  it.23  But  the  federal  income 
tax  law  of  1913  contains  a  specific  exception  in  favor  of 
"cemetery  companies  organized  and  operated  exclusively 
for  the  mutual  benefit  of  their  members." 

§  82.     Educational  and  Scientific  Institutions 

The  act  of  Congress  exempts  corporations  organized  for 
"scientific  or  educational  purposes,"  and  that  of  Wisconsin 
"scientific  and  educational  associations."  It  has  been  held 
that  a  provision  of  an  income  tax  law  exempting  from  its 
operation  private  schools,  colleges,  and  other  educational 
institutions  does  not  make  an  illegal  discrimination  such  as 
to  render  the  law  invalid  as  to  other  corporations  or  per- 
sons upon  whom  the  tax  is  imposed.24  But  it  seems  clear 
that  a  private  school,  in  which  tuition  fees  are  charged,  and 
from  which  a  revenue  is  derived  over  and  above  the  ex- 
penses, would  not  be  exempt  under  either  of  the  provisions 
quoted,  since  the  federal  statute  applies  only  to  educational 
institutions  "no  part  of  the  net  income  of  which  inures  to 
the  benefit  of  any  private  stockholder  or  individual,"  and 
the  state  law  applies  to  such  institutions  only  when  "not 
organized  or  conducted  for  pecuniary  profit."  On  the 
other  hand,  the  exemption  under  these  statutes  is  appar- 

22  St.  Andrew's  Hospital  v.  Shearsmitb,  L.  R.  19  Q.  B.  Div.  624, 
2  Tax  Cas.  219. 

23  Paddington  Burial  Board  v.  Com'rs  of  Inland  Revenue,  L.  R. 
13  Q.  B.  Div.  9,  2  Tax  Cas.  46;    Paisley  Cemetery  Co.  v.  Reith.  35 
Scotch  Law  Rep.  947,  4  Tax  Cas.  1;    Edinburgh  Southern  Cemetery 
Co.  v.  Kinmont,  2  Tax  Cas.  516. 

a*  Peacock  v.  Pratt,  121  Fed.  772,  58  C.  C.  A.  48. 

(168) 


Ch.  7)  EXEMPTIONS   AND    EXCEPTIONS  §  83 

ently  broad  enough  to  include  various  kinds  of  institutions 
which  derive  their  current  revenues  partly  from  endow- 
ment funds  and  partly  from  small  charges  to  the  public  for 
admission  to  their  buildings  or  for  the  use  of  their  privi- 
leges, such  as  art  galleries,  museums  of  curiosities  or  antiq- 
uities, academies  of  the  fine  arts,  institutions  for  the  ex- 
hibition of  objects  illustrating  the  natural  sciences,  public 
libraries,  and  the  like.  In  the  general  law  of  taxation,  and 
with  reference  to  exemptions,  there  has  been  much  doubt 
as  to  whether  such  institutions  could  be  classed  as 
"schools,"  "institutions  of  learning,"  "purely  public  chari- 
ties," or  the  like.25  But  under  the  income  tax  laws,  the 
test  is  in  the  question  whether  or  not  they  are  conducted 
for  profit,  or  whether  or  not  any  part  of  the  income  is  dis- 
tributed to  the  proprietors,  corporators,  or  shareholders 
as  a  gain  or  profit.  And  on  the  analogy  of  many  similar 
cases,  it  would  seem  that  the  mere  fact  of  admission  fees 
being  charged  would  not  make  them  institutions  conducted 
for  profit,  if  the  revenue  so  obtained  is  applied  to  the  up- 
keep or  expansion  of  the  institution,  rather  than  to  the 
benefit  of  any  private  person  interested  in  it. 

§  83.     Building  and  Loan  Associations 

Domestic  building  and  loan  associations  are  exempt  under 
the  act  of  Congress  of  1913  when  "organized  and  operated 
exclusively  for  the  mutual  benefit  of  their  members,"  follow- 
ing the  language  of  the  corporation  tax  law  of  1909.  And  a 
similar  exemption  is  found  in  the  Wisconsin  statute.  It  was 
ruled  by  the  treasury  department  that  "building  and  loan 
associations  are  not  exempt  if  they  loan  money  to  others  than 

26  Academy  of  Fine  Arts  v.  Philadelphia  County,  22  Pa.  St.  496 ; 
Gerke  v.  Purcell,  25  Ohio  St.  229 ;  Salem  Lyceum  v.  Salem,  154  Mass. 
15,  27  N.  E.  672 ;  Mercantile  Library  Co.  v.  Philadelphia,  14  Pa.  Co. 
Ct.  R.  204;  Cleveland  Library  Ass'n  v.  Pelton,  36  Ohio  St.  253; 
Philadelphia  Library  Co.  v.  Donohugh,  12  Phila.  (Pa.)  284;  Man- 
chester v.  McAdam  [1896]  App.  Cas.  500. 

(169) 


§  83  INCOME    TAXATION  (Ch.  7 

their  members,  thus  doing  a  business  similar  to  that  engaged 
in  by  banks  and  trust  companies.  It  is  also  held  that  building 
and  loan  associations  which  receive  sums  of  money  on  deposit, 
which  is  not  in  payment  of  stock,  and  on  which  the  depositor 
receives  a  fixed  rate  of  interest,  regardless  of  the  earnings 
of  the  association,  are  conducting  a  business  similar  to  a  bank- 
ing business,  and  are  therefore  subject  to  the  special  excise 
tax  on  corporations  and  should  be  required  to  make  a  return 
showing  their  net  income."  26  It  was  likewise  held  that  such 
associations,  providing  for  the  loaning  of  funds  to  nonmem- 
bers,  for  issuing  preferred  or  guarantied  interest-paying  stock, 
and  allowing  directors  to  cancel  outstanding  certificates  of 
general  stock  not  borrowed  upon,  paying  the  holder  the  book 
value  of  stock  canceled,  thereby  being  authorized  to  retire  any 
and  all  stock  in  their  discretion,  are  not  exempt  from  the 
tax.27  But  it  was  held  in  a  later  case  that,  when  a  building 
and  loan  association  is  organized  under  the  New  Jersey  stat- 
ute solely  for  the  purpose  of  making  building  loans  to  its 
members,  who  are  entitled  to  vote  in  the  management  of  the 
association's  affairs,  according  to  membership  and  not  by  vir- 
tue of  stockholding,  it  is  an  association  for  the  mutual  benefit 
of  its  members,  within  the  meaning  of  the  statute,  although, 
under  its  plan  of  operation,  there  may  be  inequality  in  the 
returns  to  the  prepaying  stockholder,  etc.,  since  the  word 
"mutual"  is  not  to  be  taken  as  synonymous  with  "equal." 
Reference  was  made  to  the  decision  above  cited,  but  it  was 
said:  "That  case  does  not  appear  to  be  applicable.  The 
shareholders  in  that  association  voted  for  the  directors  by  the 
share,  thereby  affording  opportunity  for  a  few  individuals,  by 
the  acquisition  of  shares,  to  control  the  policy  of  the  associa- 
tion. The  funds  of  that  association  appear  to  have  been  a  sub- 
ject of  loans  to  any  borrower,  without  respect  to  member- 

26  Treasury  Decisions,  No.  1655. 

27  Pacific  B.  &  L.  Ass'n  v.  Hartson,  201  Fed.  1011. 

(170) 


Ch.  7)  EXEMPTIONS   AND    EXCEPTIONS  §  84 

ship  in  the  association ;  and  there  was  a  provision  for  the  can- 
cellation of  outstanding  certificates  of  stock  not  borrowed 
upon  whenever  the  board  of  directors  deemed  advisable  to 
pay  the  holder  the  book  value  of  the  stock  so  canceled.  In 
almost  every  aspect  the  case  cited  on  behalf  of  the  collector 
is  not  applicable  to  the  present  case."  28 

§  84.     Savings  Institutions 

In  Wisconsin,  "mutual  savings  associations"  are  exempt 
from  the  payment  of  the  income  tax.  Whether  or  not  an 
institution  exercising  some  of  the  functions  of  a  bank  is  to  be 
classed  as  a  "savings  bank,"  "savings  institution,"  or  "savings 
association,"  must  be  determined  not  by  the  name  which  it 
assumes  or  by  which  it  is  chartered,  but  by  its  organization, 
powers,  and  mode  of  doing  business,  as  provided  in  its  articles 
of  incorporation.29  And  the  phrases  above  quoted  do  not 
apply  to  every  bank  merely  because  it  receives  deposits  of 
savings.  The  kind  of  associations  intended  by  the  law  in  Wis- 
consin are  those  which  are  operated  exclusively  for  the  mutual 
benefit  of  the  depositors,  who  alone — and  not  any  stockhold- 
ers or  proprietors — are  entitled  to  participate  in  the  profits. 
Such  associations  are  authorized  under  the  laws  of  numerous 
states,  as  for  example,  Massachusetts,  where  they  are  thus 
described :  A  savings  bank,  as  existing  in  this  state,  subject 
to  the  general  laws,  is  an  institution  for  the  purpose  of  receiv- 
ing deposits  for  the  benefit  of  depositors,  investing  the  same, 
accumulating  the  profits  or  interest  thereof,  paying  such  prof- 
its or  interest  to  the  depositor,  or  retaining  the  same  for  his 
greater  security.  There  is  no  capital  stock,  and  no  stock- 
holders who  are  entitled  to  receive  profits  from  the  business ; 
but  its  affairs  are  administered  by  a  board  of  trustees,  the  se- 
curities in  which  the  deposits  shall  be  invested  are  prescribed 
by  law,  and  the  conduct  of  its  affairs  is  under  the  super- 

zs  Parkview  B.  &  L.  Ass'n  v.  Herold,  203  Fed.  876. 
2»  State  v.  Lincoln  Sav.  Bank,  14  Lea  (Tenn.)  42. 

(171) 


§  84  INCOME   TAXATION  (Ch.  7 

vision  of  a  public  officer.30  So,  in  New  Jersey,  it  is  said  that 
a  savings  bank  is  a  quasi  charitable  and  purely  benevolent  in- 
stitution, its  only  object  being  the  safe  keeping  and  provident 
investment  of  the  funds  of  the  depositors.  The  members  of 
the  corporation  have  no  property  interest  in  its  funds,  of 
which  they  are  by  law  constituted  the  managers  and  guardians. 
The  depositors,  who  alone  are  beneficially  interested,  have  no 
voice  in  the  management,  nor  even  in  the  selection  of  the 
persons  to  whom  the  management  is  intrusted.  Savings  banks 
have  no  capital  stock.  They  are  incorporated  and  organized, 
not  for  the  benefit  of  the  corporators,  but  solely  for  the  ad- 
vantage of  their  depositors.31 

Also  under  the  federal  income  tax  law  of  1913  there  is  a 
special  exemption  in  favor  of  "mutual  savings  banks  not  hav- 
ing a  capital  stock  represented  by  shares." 

§  85.     Civic  Organizations  and  Chambers  of  Commerce 

It  is  specially  provided  in  the  federal  income  tax  law  that 
its  terms  shall  not  apply  to  "business  leagues,  nor  to  chambers 
of  commerce  or  boards  of  trade,  not  organized  for  profit  or  no 
part  of  the  net  income  of  which  inures  to  the  benefit  of  the 
private  stockholder  or  individual;  nor  to  any  civic  league  or 
organization  not  organized  for  profit,  but  operated  exclusively 
for  the  promotion  of  social  welfare."  A  board  of  trade,  as  the 
term  is  used  in  America,  is  an  organization  of  the  principal 
merchants,  manufacturers,  tradesmen,  etc.,  of  a  city,  for  the 
purpose  of  furthering  its  commercial  interests,  encouraging 
the  establishment  of  manufactures,  promoting  trade,  securing 
or  improving  shipping  facilities,  and  generally  advancing  the 
prosperity  of  the  place  as  an  industrial  and  commercial  com- 
munity.32 Exactly  similar  organizations  are  sometimes  called 

so  Commonwealth  v.  Reading  Sav.  Bank,  133  Mass.  13,  43  Am. 
Rep.  495. 

si  Barrett  v.  Bloomfield  Sav.  Inst.,  64  N.  J.  Eq.  425,  54  Atl.  543. 
32  Black,  Law  Diet,  voc.  "Board." 

(172) 


Ch.  7)  EXEMPTIONS   AND    EXCEPTIONS  §  86 

"chambers  of  commerce,"  and  the  two  terms  are  frequently 
stated  to  be  synonymous.33  But  more  strictly  speaking,  one 
of  the  objects  of  a  chamber  of  commerce  is  to  promote  con- 
venience or  facility  in  buying,  selling,  and  exchanging  com- 
modities. If  these  commodities  include  stocks,  bonds,  and 
other  securities,  the  body  practically  fulfills  the  functions  of  a 
stock  exchange.  And  in  fact,  in  some  cities,  the  stock  ex- 
change is  officially  denominated  the  "chamber  of  commerce" 
or  the  "board  of  trade."  If,  in  this  sense,  it  is  organized 
for  profit,  or  has  a  net  income  which  inures  to  the  benefit  of 
the  members,  it  is  clearly  not  within  the  exemption,  but  is 
subject  to  taxation  under  the  act. 

§  86.     Income  from  Property  Otherwise  Taxed 

In  the  several  states,  particularly  Massachusetts,  North  Car- 
olina, and  Oklahoma,  the  law  specifically  exempts  from  the  in- 
come tax  such  income  as  fs  derived  from  property  which  is  it- 
self subject  to  a  tax  or  on  which  a  tax  has  already  been  paid 
for  the  current  year.  The  Wisconsin  statute  contains  the  fol- 
lowing provision:  "Any  person  who  shall  have  paid  a  tax 
upon  his  personal  property  during  any  year  shall  be  permitted 
to  present  the  receipt  therefor  to,  and  have  the  same  accepted 
by,  the  tax  collector  to  its  full  amount  in  the  payment  of  taxes 
due  upon  the  income  of  such  person  during  said  year."  But 
one  who  claims  exemption  from  an  income  tax  on  the  ground 
that  his  income  consists  of  or  is  derived  from  property  not 
liable  to  taxation,  must  affirmatively  show  that  such  is  the 
case,34  and  it  is  believed  the  same  rule  should  apply  to  the 
case  of  one  who  claims  exemption  on  the  ground  that  the 
property  which  has  yielded  the  income  is  subject  to  taxation 
or  has  paid  the  tax.  And  income  derived  from  an  independent 
source  is  not  exempted  from  the  income  tax  because  it  has 
been  applied  to  the  payment  of  a  debt  due  for  real  estate,  pur- 


33  Century  Diet.,  voc.  "Chamber,"  "Trade." 

s*  City  of  New  Orleans  v.  Fourchy,  30  La.  Ann.  910. 


(173) 


§  87  INCOME    TAXATION  (Ch.  7 

chased  on  credit,  and  upon  which  real  estate  a  tax  has  been 
assessed  and  paid  for  the  same  period  within  which  such  in- 
come accrued.36 

§  87.     Proceeds  of  Life  Insurance  Policies 

Money  received  from  a  life  insurance  company  in  settlement 
of  a  claim  under  a  policy  for  the  death  of  the  assured  would 
probably  have  to  be  reckoned  as  part  of  the  "income"  of  the 
beneficiary  or  recipient,  if  not  specifically  exempted.  But  in 
pursuance  of  a  humane  and  wise  policy,  the  income  tax  laws 
have  generally  provided  for  the  exemption  of  such  funds. 
The  act  of  Congress  excepts  from  the  description  of  taxable 
income  the  proceeds  of  life  insurance  policies  paid  upon  the 
death  of  the  person  insured,  without  any  limitation  as  to  the 
amount.  The  statutes  in  Wisconsin  exempts  "insurance  to  the 
total  amount  of  ten  thousand  dollars  received  by  any  person 
or  persons  legally  dependent  upon  the  decedent,  in  payment  of 
a  death  claim  by  any  insurance  company,  fraternal  benefit  so- 
ciety, or  other  insurer."  It  will  be  observed  that  insurance 
money  is  not  exempt  in  the  hands  of  any  beneficiary  who  was 
not  "legally  dependent  upon  the  decedent,"  and  that  any 
amount  of  money  so  received  above  the  sum  of  ten  thousand 
dollars  is  taxable  as  income  of  the  year,  without  regard  to  the 
relation  between  the  decedent  and  the  beneficiary.  It  may 
also  be  remarked  that,  under  either  of  these  statutes,  money 
received  by  the  assured  himself,  as  in  the  case  of  accident  in- 
surance, will  not  be  exempt,  since  in  theory  it  merely  takes 
the  place  of  what  he  would  have  earned  during  the  period  of 
his  disability.  But  as  to  life  insurance  proper,  the  act  of 
Congress  also  exempts  "payments  made  by  or  credited  to  the 
insured,  on  life  insurance,  endowment,  or  annuity  contracts, 
upon  the  return  thereof  to  the  insured  at  the  maturity  of  the 
term  mentioned  in  the  contract,  or  upon  surrender  of  the 

ss  Lott  v.  Hubbard,  44  Ala.  593. 
(174) 


Ch.  7)  EXEMPTIONS   AND    EXCEPTIONS  §  88 

contract."     Money  so  returned,  it  is  provided,  "shall  not  be 
included  as  income." 

§  88.     Exemption  of  Fixed  Amount  of  Income 

All  income  tax  laws  have  wholly  exempted  incomes  below 
a  certain  fixed  minimum,  and  allowed  the  deduction  of  a  like 
amount  from  incomes  large  enough  to  be  subject  to  the  tax. 
The  object  is  to  relieve  from  the  burden  of  this  tax  those  per- 
sons whose  annual  earnings  or  gains  are  no  more  than  suffi- 
cient to  maintain  a  decently  comfortable  existence,  and  to 
permit  persons  of  larger  means  to  deduct  a  sum  which  may 
represent  the  ordinary  living  expenses  of  the  average  family, 
so  that  the  tax  may  not  fall  upon  the  necessaries  of  life  or  a 
reasonable  share  of  its  comforts,  but  only  upon  superfluous 
income.  As  corporations  and  partnerships  have  no  corre- 
sponding expenses,  they  are  not  entitled  to  the  exemption  of 
a  fixed  sum.  The  amount  of  this  fixed  exemption  has  varied 
enormously  in  different  localities  and  at  different  times.  In 
the  European  countries  deriving  a  revenue  from  this  source, 
it  is  very  small,  as,  for  instance,  in  Great  Britain,  $800;  in 
Prussia,  $214;  in  Norway,  $270;  in  Denmark,  $540;  in  Aus- 
tria, $250.  Under  the  act  of  Congress  of  1861,  the  exemption 
was  $800.  This  was  reduced  to  $600  in  the  acts  of  1862  and 
1864,  but  was  raised  to  $2,000  in  the  act  of  1870.  In  the  act 
of  1894,  it  was  fixed  at  $4,000.  The  income  tax  law  of  North 
Carolina  exempts  incomes  below  $1,000;  in  South  Carolina 
the  exemption  is  $2,500;  in  Oklahoma,  $3,500;  in  Virginia, 
$1,000;  in  Hawaii,  $1,000.  The  Massachusetts  statute  taxes 
"The  excess  above  two  thousand  dollars  of  the  income  from  a 
profession,  trade,  or  employment."  The  Wisconsin  statute 
allows  exemptions  as  follows :  (a)  To  an  individual,  income  up 
to  and  including  $800;  (b)  To  husband  and  wife,  $1,200;  (c) 
For  each  child  under  the  age  of  eighteen  years,  $200;  (d) 
For  each  additional  person,  for  whose  support  the  taxpayer 
is  legally  liable  and  who  is  entirely  dependent  upon  the  tax- 

(175) 


§    88  INCOME   TAXATION  (Ch.  7 

payer  for  his  support,  $200.  The  provision  of  the  act  of 
Congress  of  1913  is  that  each  taxable  person  shall  be  entitled 
to  an  exemption  of  $3,000,  with  an  additional  exemption  of 
$1,000  in  case  the  taxpayer  is  either  a  "married  man  with  a 
wife  living  with  him"  or  a  "married  woman  with  a  husband 
living  with  her."  But  in  no  event  shall  this  additional  exemp- 
tion be  deducted  by  both  a  husband  and  wife,  and  only  one 
deduction  of  $4,000  shall  be  made  from  the  aggregate  income 
of  both  husband  and  wife  when  living  together.  It  is,  in  fact, 
a  common  provision  of  income  tax  laws  that  only  one  de- 
duction of  the  fixed  amount  is  allowed  to  be  made  from  the 
aggregate  income  of  a  family,  the  husband  and  father,  if  he 
makes  the  return,  being  required  to  include  the  separate  in- 
come of  his  wife  and  of  any  of  his  minor  children  who  may 
have  independent  sources  of  income.  In  the  case  of  guard- 
ians making  the  return  for  their  wards,  the  deduction  is 
allowed  to  be  made  from  the  income  of  each  ward,  except 
where  two  or  more  of  them  are  included  in  the  same  family,  in 
which  event  only  one  deduction  from  the  aggregate  is  allowed. 
Objection  has  been  made  to  the  constitutional  validity  of  such 
a  provision,  but  it  has  been  sustained  by  the  courts.36 

In  regard  to  the  federal  income  tax,  special  provision  had 
to  be  made  with  reference  to  taxing  the  income  of  the  year 
1913,  since,  prior  to  the  adoption  of  the  Sixteenth  Amend- 
ment, Congress  had  no  constitutional  authority  to  lay  a  tax 
on  incomes,  unless  the  tax  should  be  apportioned  among  the 
several  states.  This  point  has  been  covered  by  the  insertion 
of  the  following  proviso:  "That  for  the  year  ending  De- 
cember thirty-first,  nineteen  hundred  and  thirteen,  said  tax 
shall  be  computed  on  the  net  income  accruing  from  March 
first  to  December  thirty-first,  nineteen  hundred  and  thirteen, 
both  dates  inclusive,  after  deducting  five-sixths  only  of  the 
specific  exemptions  and  deductions  herein  provided  for." 

se  Robertson  v.  Pratt,  13  Hawaii,  590. 
(176) 


Ch.  8)  DEDUCTIONS   AND    ALLOWANCES  §  89 

CHAPTER  VIII 
DEDUCTIONS   AND  ALLOWANCES 

§  89.  Expenses  of  Business. 

90.  Same ;    Wages  and  Salaries. 

91.  Same;   Traveling  Expenses. 

92.  Same ;    Cost  of  Insurance. 

93.  Same;   Rent  of  Land,  Buildings,  or  Equipment 

94.  Same;    Mining  Operations. 

95.  Same;  Judgments. 

96.  Repairs,  New  Buildings,  and  Improvements. 

97.  Interest  on  Indebtedness. 

98.  Taxes  Accrued  or  Paid. 

99.  Losses  Uncompensated. 

100.  Debts  Written  Off  as  Worthless. 

101.  Depreciation  of  Property. 

102.  Depletion  of  Ores  or  Other  Natural  Deposits. 

103.  Amortization  of  Bonds. 

104.  Dividends  from  Corporations  Subject  to  Tax. 

105.  Special  Rules  as  to  Insurance  Companies. 

106.  Rules  as  to  Foreign  Corporations. 

§  89.     Expenses  of  Business 

The  income  tax  act  of  Congress  of  1913  allows  the  indi- 
vidual taxpayer  to  deduct  from  his  return  of  net  income  "the 
necessary  expenses  actually  paid  in  carrying  on  any  business, 
not  including  personal,  living,  or  family  expenses."  In  the 
case  of  domestic  corporations,  it  allows  the  deduction  of  "all 
the  ordinary  and  necessary  expenses  paid  within  the  year  in 
the  maintenance  and  operation  of  its  business  and  properties." 
In  the  case  of  foreign  corporations,  the  deduction  may  in- 
clude "all  the  ordinary  and  necessary  expenses  actually  paid 
within  the  year  out  of  earnings  in  the  maintenance  and  opera- 
tion of  its  business  and  property  within  the  United  States." 
The  Wisconsin  income  tax  law  allows  a  corporation  to  deduct 
"ordinary  and  necessary  expenses  actually  paid  within  the 
year  out  of  income  in  the  maintenance  and  operation  of  its 
BL.INC.TAX. — 12  (177)  ' 


§  89  INCOME   TAXATION  (Ch.  8 

business  and  property,"  and  in  the  case  of  an  individual,  "the 
ordinary  and  necessary  expenses  actually  paid  within  the  year 
in  carrying  on  the  profession,  occupation,  or  business  from 
which  the  income  is  derived."  In  South  Carolina,  the  deduc- 
tion includes  "the  necessary  expenses  actually  incurred  in 
carrying  on  any  business,  occupation,  or  profession,  not  in- 
cluding remuneration  to  the  taxpayer  for  personal  supervision 
or  the  support  and  maintenance  of  his  or  her  family."  The 
statute  of  Hawaii  allows  the  deduction  of  "the  necessary  ex- 
penses actually  incurred  in  carrying  on  any  business,  trade, 
profession,  or  occupation,  or  in  managing  any  property." 
The  provision  in  Virginia  is  more  restricted,  as  it  relates  only 
to  so  much  of  the  income  as  may  be  derived  from  farming  or 
other  agricultural  pursuits,  and  allows  the  deduction  of  "all 
sums  paid  for  taxes  or  for  labor,  fences,  fertilizers,  clover  or 
other  seed  purchased  and  used  upon  the  land  upon  which  the 
vegetable  and  agricultural  productions  were  grown  or  pro- 
duced, and  the  rent  of  said  land  paid  by  said  person,  if  he  be 
not  the  owner  thereof." 

It  is  the  very  evident  purpose  of  all  these  statutes  to  lay  the 
tax  only  upon  net  income,  that  is  to  say,  upon  so  much  of  the 
gross  income  of  the  person  or  corporation  as  may  remain 
after  deducting  the  expenses  incurred  directly  in  the  produc- 
tion or  earning  of  the  income.1  At  the  same  time,  the  indi- 
vidual taxpayer  is  not  allowed  to  deduct  so  much  of  his  cur- 
rent income  as  he  has  spent  in  the  satisfaction  of  his  personal 
wants  or  desires  or  in  the  support  and  maintenance  of  his 
family,  because  in  the  first  place  such  expenditures  have  not 
contributed  directly  to  the  production  of  the  income  to  be  tax- 
ed, and  in  the  second  place,  such  expenses  are  supposed  to  be 
covered,  in  the  case  of  the  ordinary  or  average  family,  by  the 
money  exemption  which  the  statutes  also  allow.  But  provi- 
sions of  this  kind  should  be  construed  with  some  measure  of 
liberality.  Thus  it  is  held  that,  where  a  statute  taxes  a  cer- 

i  Poland  v.  Lamoille  Valley  R.  Co.,  52  Vt  144,  177. 
(ITS) 


Ch.  8)  DEDUCTIONS   AND    ALLOWANCES  §  89 

tain  class  of  corporations  (such  as  insurance  companies)  only 
upon  income  derived  from  one  particular  source  (such  as  mort- 
gages), and  allows  all  taxpayers  to  deduct  expenses  incurred 
"in  the  production  of  their  income,"  such  a  company  is  en- 
titled to  deduct  all  the  expenses  incurred  in  the  production, 
not  merely  of  its  income  from  mortgages,  but  of  its  income 
as  a  whole.2 

What  may  be  comprehended  in  the  general  description  of 
"ordinary  and  necessary  expenses"  will  depend  greatly  upon 
the  nature  of  the  business,  trade,  or  pursuit  carried  on.  But 
in  all  cases  the  prime  distinction  is  to  be  taken  between  in- 
vestment of  capital  assets  and  current  expenses.  Thus,  in  the 
case  of  a  manufacturing  establishment,  the  purchase  and  re- 
newal of  the  machinery  necessary  for  the  operation  of  the 
plant  would  be  regarded  as  an  investment  of  capital,  and  could 
not  be  deducted  as  an  item  of  expense.  This  was  brought  out 
in  an  English  case,  where  a  corporation,  with  a  view  to  ex- 
tending its  business,  opened  a  factory  and  installed  machinery, 
but  subsequently  closed  it,  removed  a  portion  of  the  ma- 
chinery, and  re-opened  the  factory  on  a  smaller  scale,  and 
thereby  lost  a  portion  of  the  original  expenditure.  This  was 
held  to  be  a  loss  of  capital,  and  that  no  deduction  could  be  al- 
lowed therefor  in  assessing  its  income  for  taxation.3  On  the 
other  hand,  where  the  business  is  one  which  is  carried  on  in  an 
office,  whatever  constitutes  permanent  equipment  might  be 
regarded  as  an  investment  of  capital,  but  whatever  is  current- 
ly consumed  or  used  up  in  the  ordinary  business  of  the  office 
(stationery,  for  example)  would  come  under  the  description 
of  expense.  Thus  it  is  held  that  ordinary  expenditures  made 
by  an  insurance  company  for  the  renewal  of  office  furniture 
and  other  such  perishable  equipment  does  not  constitute  an  ad- 
dition to  its  assets,  but  is  an  expense  of  maintenance  and  oper- 
ation, which  it  is  entitled  to  deduct  in  computing  net  income 

2  Commissioners  of  Taxation  v.  Teece  [1899]  App.  Gas.  254. 
a  Smith  v.  Westinghouse  Brake  Co.,  2  Tax  Cas.  357. 

(179) 


§  89  INCOME   TAXATION  (Ch.  8 

for  the  purpose  of  the  tax.*  The  cost  of  raw  materials  is 
naturally  an  "expense"  to  the  manufacturer,  and  the  merchant 
will  reckon  as  an  "expense"  the  prime  cost  of  the  goods  which 
he  buys  to  sell  again,  including  such  items  as  freight  or  ex- 
pressage.  But  in  an  English  case,  where  part  of  the  business 
taken  over  by  a  company  consisted  of  unexecuted  contracts, 
it  was  held  that  the  price  paid  for  such  contracts  was  not  a 
proper  deduction  from  the  profits  arising  from  their  perform- 
ance.6 Wages  and  salaries  paid  to  clerks,  salesmen,  oper- 
atives, managers,  and  so  on,  are  always  an  expense  of  operat- 
ing any  business  in  which  their  employment  is  necessary  (see 
the  next  section),  and  although  the  point  has  not  been  decided 
with  reference  to  tax  laws,  it  can  hardly  be  doubted  that  the 
cost  of  advertising  should  be  accounted  an  "ordinary  and  nec- 
essary expense,"  in  view  of  the  conditions  under  which  all 
modern  business  is  transacted.6  And  if  the  law  of  the  state 
or  an  ordinance  of  the  municipality  requires  the  payment  of 
an  annual  license  fee  or  occupation  tax,  as  a  condition  to  the 
right  to  carry  on  the  particular  business,  it  is  a  part  of  the 
necessary  and  proper  expense  thereof.7  But  in  England  it  is 
held  that  brewers  supplying  "tied"  houses  (that  is,  public 
houses  for  which  the  brewers  procure  and  pay  for  the  license, 
on  the  condition  that  the  house  shall  sell  no  other  beer  but 
theirs)  are  not  entitled  to  deduct  from  their  profits,  for  the  pur- 
pose of  the  income  tax,  the  expenses  of  unsuccessful  ap- 
plications for  new  licenses  for  such  houses.8  It  appears  also — 
though  the  question  has  more  frequently  arisen  in  other  con- 
nections— that  money  paid  to  an  attorney  at  law  for  his  pro- 
fessional services,  in  advising  concerning  legal  problems  which 
arise  in  the  course  of  the  business  conducted,  and  in  drawing 

*  Mutual  Benefit  Life  Ins.  Co.  v.  Herold,  198  Fed.  199. 
»  City  of  London  Contract  Corp.  v.  Styles,  2  Tax  Cas.  239. 
«  See  Foster  v.  Goddard,  1  Black  (U.  S.)  506,  17  L.  Ed.  228. 
T  Kane  v.  Schuylkill  Fire  Ins.  Co.,  199  Pa.  St.  205,  48  Atl.  989. 
s  Southwell  v.  Savill  Brothers,  Limited  [1901]  2  K.  B.  349,  4  Tax 
Cas.  430. 

(180) 


Ch.  8)  DEDUCTIONS   AND    ALLOWANCES  §    89 

such  papers  as  require  legal  skill  and  knowledge,  may  justly 
be  treated  as  a  part  of  the  "expenses"  of  the  business,9  and 
similar  decisions  are  to  be  found  in  regard  to  the  costs  and 
expenses  of  prosecuting  or  defending  suits  at  law,  when  litiga- 
tion becomes  a  necessary  incident  of  the  business,  either  for 
the  recovery  of  debts  or  the  repulse  of  unjust  claims.10  Many 
other  items  of  expenditure  may  present  much  more  difficult 
problems,  but  in  general  it  may  be  said  that  the  test  is  to  de- 
termine whether  a  particular  outlay  was  an  investment  or  an 
expense  of  "maintenance  or  operation,"  and,  in  the  latter  case, 
whether  it  was  "necessary"  and  "ordinary."  In  an  English 
case,  it  appeared  that  a  colliery  company  was  a  member  of  a 
"coal  owners'  association,"  to  which  it  paid  an  annual  sub- 
scription based  on  its  output  of  coal.  The  object  of  the  as- 
sociation was  to  pay  to  its  members  an  indemnity  in  the  event 
of  deficiency  or  stoppage  of  output  caused  by  strikes  or  other 
such  interferences.  The  company  contended  that  the  subscrip- 
tion made  for  this  purpose  was  a  kind  of  insurance  and  there- 
fore deductible  as  an  expense  of  its  business.  But  the  court 
held  otherwise,  and  refused  to  permit  it  as  a  deduction  in  es- 
timating the  profits  of  the  company  for  income  taxation.11  But 
this  decision  was  "distinguished"  in  a  later  case,  not  very  easy 
to  reconcile  with  it.  It  appeared  that  the  company  in  ques- 
tion was  a  member  of  an  association  of  manufacturers,  which 
was  mainly  formed  for  the  purpose  of  keeping  up  prices.  Un- 
der the  rules  and  pooling  arrangements  of  the  association,  the 
members  were  entitled  each  to  a  fixed  proportion  of  all  or- 
ders received,  and  any  member  invoicing  more  than  its  pro- 
portion must  pay  a  fixed  sum  per  ton  on  the  excess  to  the  pool 
account,  which  was  distributed  among  those  members  which 
had  invoiced  less  than  their  proportions.  It  was  held  that  the 


9  Brady  v.  Dilley,  27  Md.  570. 

10  Babbitt  v.  Selectmen  of  Savoy,  3  Cush.  (Mass.)  530 ;    Scofield  v. 
Moore,  58  Hun  (N.  Y.)  601,  11  N.  Y.  Supp.  303. 

11  Rhymney  Iron  Co.  v.  Fowler  [1896]  2  Q.  B.  79,  3  Tax  Cas.  476. 

(181) 


§  90  INCOME    TAXATION  (Ch.  8 

net  payments  made  by  the  company  to  the  association  (in- 
cluding a-  share  of  administration  expenses)  in  excess  of  those 
received  from  the  association  by  the  company,  were  an  admis- 
sible deduction  for  the  purpose  of  arriving  at  the  company's 
taxable  profits.12  Under  the  corporation  tax  law  of  1909,  the 
officers  of  the  treasury  department  ruled  that  sales  of  stock 
and  bonds  were  to  be  regarded  as  sales  of  capital  assets,  and 
should  be  so  accounted  for,  but  that  the  proceeds  derived  from 
the  sale  of  bonds,  used  in  defraying  ordinary  and  necessary 
expenses,  were  a  proper  deduction  in  determining  the  compa- 
ny's net  income.13 

§  90.     Same;  Wages  and  Salaries 

Wages  and  salaries  paid  to  clerks,  servants,  agents,  sales- 
men, managers,  superintendents,  officers,  and  other  employes 
of  the  individual  or  corporate  taxpayer  are  deductible  from 
income,  either  because  specially  mentioned,  as  they  are  in  some 
of  the  statutes,  or  as  a  necessary  expense  of  conducting  the 
business.14  But  this  applies  only  to  the  compensation  of 
those  employes  or  agents  who  are  engaged  in  the  conduct  of 
the  business  from  which  the  income  is  derived,  as  under  the 
Wisconsin  statute,  where  a  deduction  is  allowed  for  "pay- 
ments made  within  the  year  for  personal  services  of  officers 
and  employes  actually  employed  in  the  production  of  such  in- 
come." This  might  cover  the  compensation  of  a  secretary, 
amanuensis,  or  stenographer,  if  occupied  in  the  work  of  a 
profession  or  vocation  carried  on  by  his  employer  and  from 
which  the  latter's  taxable  income  was  derived.  But  the  wages 
of  domestic  servants  would  be  classed  as  "family  or  living 
expenses,"  for  which  no  deduction  is  allowed.  It  is  probably 
immaterial  whether  the  compensation  of  an  employe  is  paid  in 

12  Guest,  Keen,  &  Nettlefolds,  Limited,  v.  Fowler  [1910]  1  K.  B. 
713,  5  Tax  Cas.  511. 

is  Treasury  Decisions,  No.  1742,  par.  55. 

i*  See  Dunwoody  v.  United  States,  22  Ct.  Cl.  269,  278 ;  Foster  v. 
Goddard,  1  Black  (U.  S.)  506,  17  L.  Ed.  228. 

(182) 


Ch.  8)  DEDUCTIONS   AND   ALLOWANCES  §    90 

the  form  of  a  fyced  annual  or  monthly  wage  or  in  the  form  01 
a  commission  on  sales  or  business  transacted.  But  it  must  be 
compensation  for  services  rendered,  and  not  a  bonus  or  a  pres- 
ent. It  was  ruled  under  the  corporation  tax  law  of  1909  that 
amounts  paid  for  pensions  to  retired  employes,  or  to  their 
families  or  others  dependent  upon  them,  or  paid  on  account 
of  injuries  received  by  employes,  are  proper  deductions  as 
"ordinary  and  necessary  expenses,"  but  that  gifts  or  gratuities 
to  employes  in  the  service  of  a  corporation  are  not  properly 
deductible  in  ascertaining  its  net  income.15  And  in  England 
there  is  a  decision  that  voluntary  contributions  made  by  a  min- 
ister towards  the  stipend  of  his  assistant  minister  are  not  an 
allowable  deduction,  although  it  was  necessary  for  him  to  sup- 
plement the  stipend  in  this  way  in  order  to  secure  a  compe- 
tent assistant.16 

It  should  also  be  observed  that  an  individual  taxpayer  can- 
not escape  paying  the  income  tax,  or  reduce  its  burden,  by 
paying  himself  a  salary  for  his  own  services  in  supervising 
and  conducting  his  own  business,  and  then  deducting  the 
amount  of  it  from  the  income  which  the  business  yields. 
Some  statutes  specially  provide  against  this,  as  in  South  Car- 
olina, where  the  deduction  includes  "the  necessary  expenses 
actually  incurred  in  carrying  on  any  business,  occupation,  or 
profession,  not  including  remuneration  to  the  taxpayer  for 
personal  supervision."  And  under  any  such  statute,  it  is  be- 
lieved, this  would  be  regarded  as  a  cheat  or  evasion  which  the 
courts  would  not  sanction.  Thus,  in  a  Scotch  case,  it  was 
ruled  that,  where  testamentary  trustees  receive  annually  the 
income  of  property  and  distribute  it  among  the  beneficiaries, 
the  whole  of  such  income  is  taxable,  without  deduction  of  the 
expenses  incurred  in  the  management  or  administration  of  the 
trust.17  And  in  the  case  of  a  corporation  where  practically 

is  Treasury  Decisions,  No.  1742,  par.  64. 
IB  Lothian  v.  Macrae,  22  Scotch  Law  Rep.  219,  2  Tax  Gas.  65. 
IT  Aikin  v.  Macdonald's  Trustees,  32  Scotch  Law  Rep.  85,  3  Tax 
Cas.  306. 

(183) 


§  91  INCOME   TAXATION  (Ch.  8 

the  whole  of  the  stock  is  owned  by  one  person,  or  perhaps  by 
two  former  partners  who  have  simply  incorporated  their  busi- 
ness, the  same  principle  applies.  It  has  been  ruled  that  sal- 
aries paid  to  an  officer  who  is  a  stockholder,  to  constitute  an 
allowable  deduction,  must  be  a  reasonable  and  fair  compensa- 
tion for  the  services  rendered,  without  regard  to  the  amount 
of  stock  which  such  officer  may  hold,  and  must  have  been  au- 
thorized by  the  board  of  directors  and  made  a  matter  of  rec- 
ord on  the  minute  books  of  the  corporation,18 

§91.     Same;   Traveling  Expenses 

The  expenses  of  a  journey  may  be  included  in  the  "neces- 
sary and  ordinary  expenses"  of  carrying  on  a  given  busi- 
ness, where  the  journey  is  made  as  a  .necessary  incident  of 
the  business  or  is  otherwise  undertaken  directly  for  its  expan- 
sion or  advantage,  as,  where  a  traveling  salesman  is  allowed 
his  expenses  on  the  road,  where  the  business  of  an  individual 
necessarily  requires  him  to  move  from  place  to  place,  where 
a  buyer  for  a  store  is  sent  to  a  distant  market  to  replenish 
the  stock,  or  where  an  officer  of  a  corporation  travels  on  its 
necessary  and  proper  errands.  But  traveling  expenses  are 
not  deductible  where  they  are  incurred  merely  for  the  comfort 
or  convenience  of  the  person  concerned.  Thus,  a  public  offi- 
cer, whose  duties  are  to  be  performed  in  one  place,  but  who 
chooses  to  reside  in  another,  is  not  entitled  to  deduct,  for  the 
purpose  of  the  income  tax,  his  expenses  incurred  in  going  to 
and  fro  between  the  two  places.19  And  where  the  directors 
of  a  corporation  travel  from  their  places  of  residence  to  the 
place  of  meeting  of  the  company,  their  traveling  expenses 
are  not  an  allowable  deduction.20  But  it  is  at  least  doubtful 
whether  hotel  bills  and  other  items  of  personal  expenditure 
can  be  brought  under  the  description  of  "traveling  expenses" 

is  Treasury  Decisions,  No.  1742,  par.  81. 

19  Cook  v.  Knott,  2  Tax  Cas.  246. 

20  Revell  v.  Directors  of  El  worthy  Bros.,  Limited,  3  Tax  Cas.  12. 

(184) 


Ch.  8)  DEDUCTIONS   AND   ALLOWANCES  §  92 

in  any  case  where  such  expenses  might  constitute  a  proper  de- 
duction from  income.  The  precise  question  has  not  arisen 
under  the  income  tax  laws,  but  analogous  cases  are  not  want- 
ing. Thus,  in  a  contract  of  employment  of  a  traveling  sales- 
man for  a  certain  salary  per  annum  and  an  allowance  for 
expenses  not  to  exceed  a  certain  sum  per  day,  the  word  "ex- 
penses" was  construed  as  not  including  the  living  expenses  of 
the  salesman.21  And  a  similar  decision  was  made  in  a  case 
in  Ohio,  on  the  construction  of  a  statute  allowing  to  a  county 
commissioner  his  "reasonable  and  necessary  expenses  actually 
paid  in  the  discharge  of  his  official  duties."  It  was  held  that 
this  meant  official  expenses  only,  as  distinguished  from  those 
which  pertained  to  the  commissioner's  personal  comfort  and 
necessities.  The  court  said  that,  for  his  personal  expenses 
of  any  kind,  he  could  claim  nothing  beyond  his  per  diem  com- 
pensation and  mileage;  and  it  was  a  fair  inference  that,  if 
it  had  been  intended  to  reimburse  him  for  board  or  traveling 
expenses  in  addition  to  mileage,  when  traveling  on  county 
business,  the  legislature  would  have  expressed  that  intention 
in  plain  terms.22 

§  92.     Same;    Cost  of  Insurance 

Premiums  paid  for  policies  of  fire  insurance  were  allowed 
to  be  deducted  from  the  taxpayer's  net  income  under  the  fed- 
eral income  tax  act  of  1894,  and  although  this  item  is  not 
specified  in  the  statute  now  in  force,  nor  in  the  laws  of  the 
states,  it  cannot  be  doubted  that  it  should  be  allowed  as  a  part 
of  the  "necessary  and  ordinary"  expense  of  conducting  a 
business,  where  the  insurance  is  written  on  any  building  in 
which  the  business  is  carried  on,  or  on  a  stock  in  trade,  or 
on  unfinished  products  of  a  factory,  or  on  office  furniture 
and  fixtures,  though  of  course  the  cost  of  insuring  one's  dwell- 
ing could  not  be  so  deducted.  This  is  also  the  rule  in  Eng- 

21  Dowd  v.  Krall,  32  Misc.  Rep.  (N.  T.)  252,  65  N.  Y.  Supp.  797. 

22  Richardson  v.  State,  66  Ohio  St.  108,  63  N.  E.  593. 

(185) 


§  93  INCOME   TAXATION  (Ch.  8 

land  under  the  income  tax  law  of  that  country,23  and  it  is 
a  general  principle  of  law  that  the  cost  of  insurance  is  prop- 
erly included  under  the  head  of  "expenses"  in  almost  any  con- 
nection in  which  that  term  can  be  used.24  Thus,  as  between  a 
life  beneficiary  and  a  remainderman,  premiums  paid  for  fire 
insurance  on  the  premises  are  a  proper  expense  of  adminis- 
tering the  property  and  are  therefore  payable  out  of  income.25 

§  93.     Same;    Rent  of  Land,  Buildings,  or  Equipment 

The  act  of  Congress  in  force  allows  corporations  to  deduct 
from  net  income,  under  the  head  of  expenses,  "rentals  or  other 
payments  required  to  be  made  as  a  condition  to  the  contin- 
ued use  or  possession  of  property,"  and  although  this  is  not 
repeated  in  the  provisions  relating  to  individual  taxpayers,  it 
seems  clear  that,  in  the  case  of  any  business  conducted  on 
leased  premises,  the  rent  is  a  "necessary  expense."  of  the  busi- 
ness. Rent  is  not  specially  mentioned  in  the  statutes  of  the 
several  states,  except  Virginia,  where  the  rent  paid  for  agri- 
cultural land  is  allowed  to  be  deducted  from  the  profit  real- 
ized on  the  crops.  But  only  the  actual  rent  paid,  or  the  actual 
rental  value  of  the  premises,  can  be  thus  deducted,  and  not 
the  additional  expense  which  may  be  incurred  in  the  purchase 
of  a  lease  for  a  term  of  years.  Thus,  the  English  courts  hold 
that  where  leasehold  premises  are  purchased  and  used  for 
trade  purposes,  the  deduction  from  the  assessment  on  the 
trade  profits  in  respect  to  such  premises  must  be  limited  to 
the  existing  annual  value  thereof,  whatever  may  have  been 
the  premium  originally  paid,  that  is,  the  tenant  is  only  enti- 
tled to  deduct  the  annual  rent,  and  not  to  amortize  the  pre- 
mium by  distributing  it  over  the  years  yet  to  run.28  So  they 
hold  that  a  brewer  paying  a  premium  for  a  lease  of  a  public 

23  Society  of  Writers  to  the  Signet  v.  Inland  Revenue,  24  Scotch 
Law  Rep.  27,  2  Tax  Cas.  257. 

24  See  Foster  v.  Goddard,  1  Black  (U.  S.)  506,  17  L.  Ed.  228. 

25  Bridge  v.  Bridge,  146  Mass.  373,  15  N.  E.  899. 

26  Gillatt  v.  Colquhoun,  2  Tax  Cas.  76. 

(186) 


Ch.  8)  DEDUCTIONS   AND    ALLOWANCES  §  94 

house,  for  the  purpose  of  letting  it  to  a  tenant  under  a  cove- 
nant to  buy  beer  brewed  by  him,  is  not  entitled  to  a  deduction 
on  account  of  the  gradual  exhaustion  of  the  premium.27  That 
rent  paid  for  personal  property,  as  well  as  for  land,  may  be 
an  expense  of  the  business  in  which  it  is  employed,  appears 
from  a  case  in  Pennsylvania,  where  it  was  held  that  compen- 
sation for  the  use  of  rolling-stock  or  other  equipment  which 
is  hired,  and  not  owned,  by  a  railroad  company,  is  certainly 
a  part  of  the  expense  of  the  business  which  it  transacts,  and 
is  therefore  a  part  of  the  operating  expenses  of  the  road.28 

§  94.     Same;    Mining  Operations 

The  rule  is  settled  in  England  that  the  cost  of  sinking  a  pit 
or  shaft  on  a  coal  or  iron  mining  property,  to  open  up  new 
seams  or  deposits,  is  an  expenditure  of  capital  and  properly 
chargeable  to  that  account,  and  cannot  be  regarded  as  an  ordi- 
nary expense  of  the  business,  so  as  to  be  deductible  from  in- 
come for  the  purpose  of  estimating  the  taxable  net  income.29 
And  a  tenant  of  minerals,  though  he  may  be  under  a  constant 
vanishing  expense  in  sinking  new  pits  as  the  old  ones  become 
exhausted,  is  not  entitled,  in  computing  his  profits  for  the 
assessment  of  the  income  tax,  to  deduct  from  the  gross  prof- 
its a  sum  estimated  as  representing  the  amount  of  capital 
expended  in  making  bores  and  sinking  pits  which  have  be- 
come exhausted  by  the  year's  work.30  But  in  construing  and 
applying  the  corporation  tax  act  of  Congress  of  1909,  the 
Commissioner  of  Internal  Revenue  made  a  regulation  that 
the  cost  of  drilling  wells,  by  natural-gas  companies,  might  be 
charged  to  expense  account,  rather  than  investment  account, 
and  so  allowed  in  their  returns.  It  was  said:  "The  cost  of 
drilling  gas  wells  has  been  held  by  competent  authorities  as 

27  Watney  v.  Musgrave,  L.  R.  5  Ex.  Div.  241,  1  Tax   Cas.  272. 
zs  Commonwealth  v.  Philadelphia  &  E.  R.  R.,  164  Pa.  St  252,  30 
Atl.  145. 

29  in  re  Addie  &  Sons,  12  Scotch  Law  Rep.  274,  1  Tax  Cas.  1. 
so  Coltness  Iron  Co.  v.  Black,  L.  R.  6  App.  Cas.  315. 

(187) 


§  95  INCOME    TAXATION  (Ch.  8 

properly  chargeable  to  either  investment  or  expense.  While 
it  is  preferred  that  the  cost  of  drilling  wells  be  charged  to  in- 
vestment, the  general  custom  of  producers  of  natural  gas  in 
charging  the  cost  of  drilling  to  expense  will  be  recognized, 
and  returns  of  net  income  may  be  made  in  accordance  there- 
with. Each  return  of  annual  net  income  should  in  such  case 
state  that  the  expense  of  drilling  gas  wells  has  been  charged 
to  expense.  All  other  expenditures  in  tangible  property  in 
development  work  shall  be  chargeable  to  capital  assets."  31 
But  the  Commissioner  also  ruled  that,  in  the  case  of  petroleum 
producing  properties,  the  cost  of  drilling  and  equipping  new 
producing  wells  should  be  considered  and  treated  as  an  addi- 
tion to  capital  investment  account,  but  that  the  expense  of 
drilling  holes  which  proved  to  be  dry  might  be  charged  to 
profit  and  loss.32 

§  95.     Same;    Judgments 

If  a  judgment  is  recovered  against  the  taxpayer  (whether  an 
individual  or  a  corporation)  and  paid  within  the  year  for  which 
the  return  is  to  be  made,  the  question  whether  it  is  deductible 
as  an  "ordinary  and  necessary  expense"  should  be  determined 
by  reference  to  the  cause  of  action  on  which  it  was  recovered^ 
If  the  claim  was  for  goods  sold,  money  had  and  received,  serv- 
ices rendered,  or  otherwise  founded  on  contract  or  quasi  con- 
tract, it  should  be  easy  to  determine  whether  the  plaintiff's 
demand  arose  out  of  or  was  incident  to  the  conduct  of  the  de- 
fendant's business,  and  if  so,  the  change  in  its  form,  from  a 
disputed  claim  to  a  judgment,  should  not  affect  the  question  of 
its  allowance  as  a  deduction.  But  in  the  case  of  a  judgment  for 
a  tort,  the  matter  is  not  so  clear.  So  far  as  the  authorities  go, 
they  may  be  said  to  favor  the  rule  that  if  the  tort  was  com- 
mitted directly  in  the  course  of  the  business  operations  of  the 


«i  Treasury  Decisions,  No.  1754. 
•  2  Treasury  Decisions,  No.  1755. 

(188) 


Ch.  8)  DEDUCTIONS   AND    ALLOWANCES  §  95 

defendant,  or  the  circumstances  constituting  it  were  such  as 
might  ordinarily  arise  in  the  prosecution  of  that  business,  then 
the  payment  of  the  damages  (whether  by  settlement  out  of 
court  or  after  judgment)  may  be  regarded  as  an  "expense"  of 
the  business.  But  if  the  tort  had  no  connection  with  the  busi- 
ness carried  on,  and  did  not  arise  out  of  its  usual  or  ordinary 
conduct,  it  cannot  be  considered  as  an  expense  of  that  busi- 
ness. And  this  would  naturally  apply  also  to  torts  having 
also  a  criminal  aspect,  such  as  libel  or  slander  or  assault  and 
battery.  Thus  it  was  ruled,  under  the  corporation  tax  law  of 
1909,  that  amounts  paid  on  account  of  injuries  received  by  em- 
ployes in  the  course  of  their  employment  would  be  proper  de- 
ductions as  ordinary  and  necessary  expenses  of  the  business.33 
And  in  an  English  case,  the  Lord  Chancellor  gave  as  an  illus- 
tration of  an  allowable  deduction  "losses  sustained  by  a  rail- 
way company  in  compensating  passengers  for  accidents  in 
traveling."  34  So  again,  a  decision  in  Massachusetts  holds  that 
the  "operating  expenses"  of  a  railroad  company  should  be 
construed  to  include  a  claim  for  damages  done  to  property  by 
the  railroad  company  in  negligently  running  a  train  at  a  high- 
way crossing.35  But  on  the  other  hand,  where  a  brewery  com- 
pany owned  an  inn,  which  was  carried  on  by  a  manager  as 
a  part  of  its  business,  and  a  customer  sleeping  in  the  inn  was 
injured  by  the  fall  of  a  chimney,  which  accident  was  attributa- 
ble to  the  negligence  of  the  company's  servants,  and  he  re- 
covered a  judgment  for  damages,  it  was  held  that  the  amount 
thereof  could  not  be  deducted  in  estimating  the  balance  of 
profits  for  the  purpose  of  the  income  tax,  the  loss  not  being 
connected  with  or  arising  out  of  the  trade,  and  not  being 
money  wholly  or  exclusively  laid  out  for  the  purposes  of  the 
trade.38  And  in  the  case  in  which  this  decision  was  made,  a 

33  Treasury  Decisions,  No.  1742,  par.  64. 

34  Strong  &  Co.  v.  Woodifield  [1906]  App.  Cas.  448. 

35  Smith  v.  Eastern  R.  Co.,  124  Mass.  154. 

*«  Strong  &  Co.  v.  Woodifield  [1906]  App.  Cas.  448. 

(189) 


§  96  INCOME   TAXATION  (  Ch.  8 

further  illustration  was  given,  as  follows:  "If  a  man  kept  a 
grocer's  shop,  for  keeping  which  a  house  is  necessary,  and 
one  of  the  window  shutters  fell  upon  and  injured  a  man  walk- 
ing in  the  street,  the  loss  thereby  arising  to  the  grocer  ought 
not  to  be  deducted"  from  net  taxable  income. 

§  96.     Repairs,  New  Buildings,  and  Improvements 

The  cost  of  repairs  to  property,  such  as  may  be  necessary 
to  restore  dilapidation  or  to  keep  it  in  serviceable  and  efficient 
condition  for  the  purpose  of  the  business  in  which  it  is  em- 
ployed, is  plainly  deductible  as  an  "ordinary  and  necessary  ex- 
pense" of  the  business  or  of  "the  maintenance  and  operation 
of  the  business  or  property,"  as  these  terms  are  used  in  the 
income  tax  laws.  Thus,  under  the  act  of  Congress  of  1864,  it 
was  said:  "The  object  of  the  law  was  to  impose  a  tax  on  net 
income  or  profits  only,  and  that  cannot  be  regarded  as  net  in- 
come or  profits  which  is  required  and  expended  to  keep  the 
property  up  in  the  usual  condition  proper  for  operation.  Such 
expenditure  is  properly  classed  with  repairs,  which  are  a  part 
of  the  current  expenses."  37  And  it  has  been  ruled  that  the 
cost  of  erecting  a  building,  if  included  in  the  terms  of  a  lease 
under  which  the  property  is  held  by  a  corporation,  is  a  proper 
deduction  from  its  return  of  income  for  taxation,  but  should 
be  prorated  according  to  the  time  fixed  by  the  lease.38  But  if 
a  corporation  has  been  allowed  a  deduction  for  repairs  to,  and 
renewals  of,  its  machinery  and  other  appliances,  sufficient  to 
cover  the  actual  loss  by  wear  and  tear,  it  cannot  be  allowed 
a  further  deduction  for  estimated  depreciation  of  its  plant ;  in 
other  words,  it  cannot  "get  deduction  for  deterioration  twice 
over." 39  But  "repairs"  do  not  include  new  constructions. 
And  the  income  tax  laws  generally  provide  that  no  deduction 

37  Grant  v.  Hartford  &  N.  H.  R.  Co.,  93  U.  S.  225,  23  L.  Ed.  878. 
s  s  Treasury  Decisions,  No.  1742,  par.  51. 

39  Caledonain  Ry.  Co.  v.  Banks,  18  Scotch  Law  Eep.  85,  1  Tax 
Cas.  487. 

(190) 


Ch.  8)  DEDUCTIONS   AND    ALLOWANCES  §  96 

shall  be  allowed  to  the  taxpayer  for  money  laid  out  in  the 
cost  of  new  buildings,  permanent  improvements,  or  better- 
ments, made  to  increase  the  value  of  his  property  or  estate. 
This  is  in  accordance  with  general  principles  of  law.  Thus,  in 
estimating  the  profits  of  the  business  of  a  partnership,  it  is  er- 
ror to  include  among  the  expenditures  such  amounts  as  have 
been  expended  in  permanent  improvements  to  the  real  estate 
of  the  firm.  Such  improvements  must  be  regarded  as  an  in- 
vestment of  capital.40  So,  a  corporation  purchasing  gas  works 
in  a  defective  structural  condition  is  not  entitled  to  deduct,  in 
making  its  return  of  income  for  taxation,  sums  set  aside  an- 
nually out  of  the  profits  to  be  expended  in  future  years  on  re- 
storing the  plant  and  apparatus.41  And  a  railway  company 
is  not  entitled  to  deduct  from  its  profits  sums  expended  in 
improving  a  section  of  the  line  so  as  to  bring  it  up  to  the  stand- 
ard of  the  main  line,  nor  the  cost  of  the  extra  weight  of  heavy 
rails  and  other  equipment  substituted  for  lighter  ones.42  In 
this  connection,  however,  it  is  pertinent  to  remark  that  mod- 
ern ideas  of  sound  corporation  finance  require  that  only  those 
expenditures  for  improvements  or  betterments  should  be 
charged  to  capital  accounts  which  will  bring  in  new  income,  in- 
crease current  income,  or  lessen  the  cost  of  production.  Those 
which  do  not  increase  the  productivity  of  the  plant,  in  one 
way  or  the  other,  are  charged  against  working  expenses,  repair 
or  replacement  account,  or  profit  and  loss.  In  this  view,  if  a 
railroad  company  replaces  a  wooden  bridge  with  a  stone  or 
steel  bridge,  it  would  not  be  treated  as  an  investment  of  capital 
assets,  unless,  perhaps,  it  was  part  of  a  comprehensive  system 
of  improvements  undertaken  with  a  view  to  running  heavier 
trains  and  handling  a  larger  volume  of  traffic.43  But  in  the 

40  Braun's  Appeal,  105  Pa.  St.  414. 

41  Clayton  v.  New  Castle-Under-Lyme  Corp.,  2  Tax   Cas.  416. 

42  Highland  Ry.  Co.  v.  Balderstone,  26  Scotch  Law  Rep.  657,  2 
Tax  Cas.  485. 

43  See  Greene,  Corporation  Finance  (3d  edn.,  1904)  p.  86. 

(191) 


§  97  INCOME   TAXATION  (Ch.  8 

ligfit  of  the  decisions  above  referred  to,  it  seems  clear  that  such 
an  expenditure  could  not  be  deducted  (for  the  purpose  of  the 
income  tax)  as  a  part  of  the  expense  of  conducting  the  busi- 
ness or  maintaining  the  property,  but  must  be  treated  as  a  new 
building,  improvement,  or  betterment. 

§  97.     Interest  on  Indebtedness 

The  income  tax  law  of  Wisconsin  allows,  in  the  case  of 
the  individual  only,  the  deduction  of  "interest  paid  within  the 
year  on  existing  indebtedness."  That  of  Hawaii  provides  for 
the  deduction  of  "all  interest  paid  by  such  person  or  corpora- 
tion on  existing  indebtedness."  The  act  of  Congress  of  1913 
discriminates  between  individuals  and  corporations.  In  the 
case  of  the  former,  it  allows  a  deduction  of  "all  interest  paid 
within  the  year  by  a  taxable  person  on  indebtedness."  But 
in  the  case  of  a  corporation,  the  deduction  allowed  is  of  "in- 
terest accrued  and  paid  within  the  year  on  its  indebtedness  to 
an  amount  of  such  indebtedness  not  exceeding  one-half  of 
the  sum  of  its  interest-bearing  indebtedness  .and  its  paid-up 
capital  stock  outstanding  at  the  close  of  the  year,  or  if  no 
capital  stock,  the  amount  of  interest  paid  within  the  year  on 
an  amount  of  its  indebtedness  not  exceeding  the  amount  of 
the  capital  employed  in  the  business  at  the  close  of  the  year." 
To  this  there  is  added  a  proviso  that,  "in  case  of  indebtedness 
wholly  secured  by  collateral  the  subject  of  sale  in  ordinary 
business  of  such  corporation,  joint  stock  company,  or  asso- 
ciation, the  total  interest  secured  and  paid  by  such  company, 
corporation,  or  association  within  the  year  on  any  such  in- 
debtedness may  be  deducted  as  a  part  of  its  expense  of  doing 
business."  And  further  it  is  provided  that,  "in  the  case  of 
bonds  or  other  indebtedness,  which  have  been  issued  with  a 
guaranty  that  the  interest  payable  thereon  shall  be  free  from 
taxation,  no  deduction  for  the  payment  of  the  tax  herein  im- 
posed shall  be  allowed."  But  in  the  case  of  a  bank,  banking 
association,  or  loan  or  trust  company,  the  deduction  may  cov- 
(192) 


Ch.  8)  DEDUCTIONS   AND    ALLOWANCES  §  97 

er  "interest  paid  within  the  year  on  deposits  or  on  moneys 
received  for  investment  and  secured  by  interest-bearing  cer- 
tificates of  indebtedness  issued  by  such  bank,  banking  associa- 
tion, loan  or  trust  company." 

Construing  a  similar  provision  in  the  act  of  1909  (with 
reference  to  the  capital  stock  of  a  corporation  as  the  measure 
of  the  indebtedness  for  which  it  might  claim  a  deduction  with 
respect  to  interest  paid),  it  was  ruled  that  the  full  amount  of 
stock  as  represented  by  the  par  value  of  the  shares  issued  is 
to  be  regarded  as  the  paid-up  capital  stock,  except  when  such 
stock  is  assessable  on  account  of  deferred  payments,  in  which 
case  the  amount  actually  paid  on  such  shares  will  constitute 
the  actual  paid-up  capital.  Capital  stock  is  also  held  to  in- 
clude both  preferred  and  common  stock,  but  surplus  and  un- 
divided profits  are  not  to  be  included.44  There  was  also  a 
ruling  that  interest  on  portions  of  bonded  or  other  indebted- 
ness bearing  different  rates  of  interest  may  be  deducted  from 
gross  income,  provided  the  aggregate  amount  of  such  indebt- 
edness does  not  exceed  the  paid-up  capital  stock  plus  half 
the  bonded  debt.45  An  opinion  was  given  by  the  Attorney 
General,  on  the  construction  of  the  same  statute,  that,  in  as- 
certaining the  net  income  of  a  corporation  for  taxation  under 
that  act,  the  business  of  the  corporation  being  holding  and 
dealing  in  real  estate,  interest  on  an  indebtedness  assumed  by 
the  corporation  and  secured  by  mortgage  on  a  property  which 
it  acquires,  can  be  deducted  only  to  an  amount  not  exceeding 
interest  at  a  corresponding  rate  on  the  amount  of  its  paid-up 
capital  stock.  For  by  assuming  the  indebtedness,  the  cor- 
poration makes  it  "its"  indebtedness,  and  the  limitation  of  the 
statute  applies.  But  where  such  a  corporation  takes  title  to 
real  property  subject  to  a  mortgage,  but  does  not  assume  the 
indebtedness  secured  thereby,  the  interest  on  such  indebted- 
ness may  be  deducted  from  its  gross  income,  without  limita- 

44  Treasury  Decisions,  No.  1742,  pars.  15-17. 

45  Treasury  Decisions,  No.  1742,  par.  67. 

BL.INC.TAX. — 13  (193) 


§  97  INCOME   TAXATION  (Ch.  8 

tion  as  to  the  amount  of  its  paid-up  capital  stock,  because  the 
indebtedness  in  this  case  is  not  "its"  indebtedness,  but  the 
interest  payment  is  a  "charge  required  to  be  made  as  a  con- 
dition to  the  continued  use  or  possession  of  property."  46 
In  regard  to  interest  payments  in  general,  it  has  been  held 
that  the  amount  paid  for  accrued  interest  on  securities  pur- 
chased is  properly  chargeable  to  income  account,47  and  there- 
fore, on  a  parity  of  reasoning,  should  be  deductible  from  the 
return  of  income  for  taxation.  Under  the  English  law,  money 
paid  in  the  form  of  interest  on  deposits  by  a  company  doing  a 
banking  business  or  a  loan  and  discount  business,  is  not  de- 
ductible from  its  assessment  for  the  income  tax.*8  But  the 
rule  must  be  otherwise  under  the  act  of  Congress  now  in 
force,  since  it  explicitly  provides  for  the  deduction,  "in  the 
case  of  a  bank,  banking  association,  or  trust  company,  of  in- 
terest paid  within  the  year  on  deposits."  As  to  the  case  of 
bank  discounts,  it  is  held  in  England  that  where  a  mercantile 
company,  in  order  to  be  able  to  pay  cash  for  goods  purchased 
and  thereby  secure  them  at  a  better  price  than  if  bought  on 
credit,  borrows  money  on  short  time  paper  from  bankers,  the 
interest  on  such  banking  loans  is  not  a  proper  deduction  for 
the  purpose  of  the  income  tax.49  But  the  officers  of  the  treas- 
ury department,  under  the  act  of  1909,  held  that  discounts, 
other  than  bank  discounts  on  notes  executed  by  the  corpora- 
tion, should  be  segregated  from  the  interest  item  on  the  re- 
turn, and  should  be  included  under  the  heading  of  expenses.60 
In  Wisconsin,  the  state  tax  commission  rules  that  "discounts 
on  obligations  incurred  but  not  discharged  within  the  year 
would  not  come  under  the  head  of  interest  paid.  When  the 


*e  28  Opin.  Atty.  Gen.  p.  198. 
4T  People  v.  Davenport,  30  Hun  (N.  Y.)  177. 
48  Mersey  Loan  &  Discount  Co.  v.  Wootton,  2  Tax  Cas.  316. 
4»  Anglo-Continental  Guano  Works  v.  Bell,  70  Law  T.  (N.  S.)  670, 
3  Tax  Cas.  239. 

so  Treasury  Decisions,  No.  1742,  par.  90. 

(194) 


Ch.  8)  DEDUCTIONS   AND    ALLOWANCES  §  98 

interest  is  deducted  from  a  loan  in  advance,  such  interest  can- 
not be  said  to  be  'paid'  until  the  note  is  paid."  51 

But  in  any  case,  nothing  can  be  deducted  under  this  head 
except  what  is  strictly  and  properly  to  be  described  as  "inter- 
est." Thus,  in  an -English  case,  where  a  mining  company 
borrowed  money  to  be  employed  in  its  business,  and  cove- 
nanted to  pay  interest  thereon  annually  and  also  to  repay  the 
capital  with  an  additional  bonus  of  ten  per  cent,  it  was  held 
that  the  bonus  paid  could  not  be  claimed  as  a  deduction  in 
estimating  the  assessable  profits  of  the  company.52  So  where 
a  mortgage  company  raises  money  on  an  issue  of  debentures, 
and  lends  the  money  at  a  higher  rate  of  interest,  a  commis- 
sion paid  to  brokers  and  other  expenses  incurred  in  raising 
the  money  cannot  be  deducted  from  its  assessment.63  And 
where  a  company  is  empowered  by  act  of  Parliament  to  raise 
money  upon  mortgage  for  the  purpose  of  carrying  out  a  gov- 
ernment contract,  but  is  required  by  the  same  act  to  establish 
a  sinking  fund  for  the  extinction  of  the  mortgage  debt,  and  a 
sum  is  to  be  set  aside  for  payment  into  the  sinking  fund  out 
of  each  quarterly  payment  received  under  the  contract  or  out 
of  other  money  belonging  to  the  company,  the  sums  so  set 
aside  are  not  allowable  as  a  deduction  in  arriving  at  the  com- 
pany's taxable  profits.54 

§  98.     Taxes  Accrued  or  Paid 

In  the  income  tax  law  of  Hawaii  it  is  provided  that  "all 
government  taxes  and  license  fees  paid  within  the  year  shall 
be  deducted  from  the  gains,  profits  or  income  of  the  person 
who,  or  the  corporation  which,  has  actually  paid  the  same, 

51  Wisconsin  Income  Tax  Law,  edition  published  by  State  Tax 
Commission,  1911,  p.  17. 

02  Arizona  Copper  Co.  v.  Smiles,  29  Scotch  Law  Rep.  134,  3  Tax 
Gas.  149. 

ss  Texas  Land  &  Mtg.  Co.  v.  Holtham,  3  Tax  Gas.  255. 

6*  City  of  Dublin  Steam  Packet  Co.  v.  O'Brien,  6  Tax  Gas.  101, 
following  Mersey  Docks  &  Harbour  Board  v.  Lucas,  2  Tax  Gas.  25. 

(195) 


§  98  INCOME    TAXATION  (Ch.  8 

whether  such  person  or  corporation  be  owner,  tenant,  or 
mortgagor."  The  concluding  clause  of  this  provision  was 
apparently  copied  from  the  act  of  Congress  of  1894,  which 
in  turn,  derived  it  from  the  acts  of  1864  and  1870.  In  all 
these  statutes,  it  is  of  course  apparent  that  the  use  of  the 
word  "mortgagor"  is  a  legislative  blunder  for  "mortgagee." 
And  although  the  other  existing  acts  do  not  specially  pro- 
vide for  this  case,  it  can  hardly  be  doubted  that  a  mort- 
gagee of  realty  paying  the  taxes  thereon  would  be  entitled  to 
deduct  them  from  his  return  of  income  for  taxation.  The 
statute  in  Wisconsin,  however,  is  quite  strict  in  this  particu- 
lar. In  the  case  of  corporations,  it  allows  the  deduction  of 
"sums  paid  by  such  person  [corporation]  within  the  year  for 
taxes  imposed  by  any  state  of  this  Union  or  subdivisioo 
thereof,  or  any  territory  or  possession  of  the  United  States, 
upon  the  source  from  which  the  income  taxed  by  this  act  is 
derived."  This  excludes  any  taxes  assessed  under  the  au- 
thority of  the  federal  government.  As  to  individuals,  it 
provides  for  the  deduction  of  "taxes  paid  by  such  persons 
during  the  year,  other  than  inheritance  taxes,  upon  the 
property  or  business  from  which  the  income  hereby  taxed 
is  derived."  This  would  not  allow  the  taxpayer  to  deduct 
the  amount  paid  by  him  under  the  federal  income  tax  law, 
since  that  is  not  a  tax  on  his  property  or  business,  but  upon 
the  income  itself. 

The  act  of  Congress  of  1913,  in  its  application  to  individ- 
ual taxpayers,  allows  the  deduction  of  "all  national,  state, 
county,  school,  and  municipal  taxes  paid  within  the  year, 
not  including  those  assessed  against  local  benefits."  In  the 
case  of  a  corporation,  it  permits  the  deduction  of  "all  sums 
paid  by  it  within  the  year  for  taxes  imposed  under  the  au- 
thority of  the  United  States  or  of  any  state  or  territory 
thereof,  or  imposed  by  the  government  of  any  foreign  coun- 
try." The  meaning  is  that  a  domestic  corporation  may  de- 
duct any  and  all  taxes  assessed  against  it,  and  paid,  under 

(196) 


Ch.  8)  DEDUCTIONS    AND    ALLOWANCES  §  98 

federal,  state,  or  municipal  authority,  and  whether  in  the 
nature  of  franchise  or  occupation  taxes  or  taxes  on  prop- 
erty, and  that  such  a  corporation,  owning  property  or  do- 
ing business  in  foreign  countries,  may  also  deduct  such  tax- 
es paid  abroad  as  are  imposed  by  the  foreign  government. 
This  was  the  practical  construction  placed  on  the  correspond- 
ing provision  of  the  act  of  1909  by  the  officers  of  the  gov- 
ernment who  were  charged  with  its  administration.55  This 
is  also  in  substantial  accordance  with  the  provisions  of  the 
English  income  tax  law,  which  permit  an  English  company 
doing  business  abroad  to  deduct  from  its  assessment  for  in- 
come tax  any  amount  paid  by  it  for  taxes  assessed  by  the 
foreign  government  on  the  net  profits  of  its  business.56  As 
to  foreign  corporations  doing  business  in  America,  the  pro- 
vision of  the  act  of  1913  is  that  such  a  company  may  deduct 
"all  sums  paid  by  it  within  the  year  for  taxes  imposed  under 
the  authority  of  the  United  States  or  of  any  state  or  terri- 
tory thereof  or  the  District  of  Columbia." 

Funds  set  aside  by  a  corporation  out  of  its  current  earn- 
ings as  a  reserve  for  the  payment  of  accruing  taxes,  or 
taxes  which  have  accrued  but  which  have  not  yet  been  paid, 
cannot  be  allowed  as  a  deduction,  since  the  statute  specif- 
ically provides  that  only  such  sums  as  are  "paid"  within  the 
year  for  taxes  can  be  deducted.57  And  where  the  state  law 
provides  that  stockholders  in  banking  corporations  shall  be 
assessed  and  taxed  upon  the  value  of  their  shares  of  stock 
therein,  and  that  the  bank  shall  collect  the  tax  and  pay  over 
the  amount  to  the  proper  local  authorities,  this  does  not 
convert  the  tax  into  a  tax  upon  or  against  the  bank  itself. 
Hence  if  a  bank  pays  the  taxes  assessed  upon  its  sharehold- 
ers, but  neglects  or  omits  to  collect  the  sums  so  paid  from 
the  several  stockholders,  or  to  reimburse  itself  by  deducting 

55  Treasury  Decisions,  No.  1742,  par.  73. 

so  Stevens  v.  Durban-Roodepoort  Gold  Min.  Co.,  5  Tax  Cas.  402. 

57  Treasury  Decisions,  No.  1742,  par.  77. 

(197) 


§  99  INCOME    TAXATION  (Ch.  8 

such  sums  from  their  dividends,  it  will  not  be  entitled  to 
claim  a  deduction  thereof  in  its  income-tax  return  under  the 
heading  of  taxes  paid.58  Customs  duties  paid  on  the  im- 
portation of  goods  from  abroad  may  be  classed  as  "taxes," 
for  the  purposes  of  this  statute,  but  if  an  importing  merchant 
has  included  such  duties  in  estimating  the  cost  of  the  goods, 
for  the  purpose  of  computing  his  profits  on  their  sale,  he 
will  not  be  entitled  to  deduct  them  from  his  net  income  as 
taxes  paid.69  As  to  legacy  or  inheritance  taxes,  they  are 
probably  included  under  the  broad  general  term  "taxes"  in 
the  federal  statute,  but  the  Wisconsin  statute  expressly  for- 
bids their  deduction.  In  New  York,  it  is  held  that  the  fed- 
eral inheritance  tax  to  be  paid  under  the  War  Revenue  Act 
of  1898  is  not  to  be  deducted  from  the  valuation  of  an  estate 
for  the  purpose  of  a  state  transfer  or  inheritance  tax,  for 
it  is  not  a  tax  upon  property,  but  one  against  the  legatee  and 
payable  out  of  his  legacy.60  But  a  contrary  decision  has 
been  made  in  Massachusetts.61 

§  99.     Losses  Uncompensated 

The  federal  income  tax  law  allows  the  individual  taxpayer 
to  deduct  "losses  actually  sustained  during  the  year,  incurred 
in  trade  or  arising  from  fires,  storms,  or  shipwreck,  and  not 
compensated  for  by  insurance  or  otherwise."  In  the  case 
of  corporations,  the  deduction  is  to  be  for  "all  losses  actual- 
ly sustained  within  the  year  and  not  compensated  by  insur- 
ance or  otherwise."  Under  the  statute  in  Wisconsin,  a  de- 
duction is  allowed,  in  both  cases,  for  "losses  actually  sus- 
tained within  the  year  and  not  compensated  for  by  insur- 
ance or  otherwise."  The  law  in  Hawaii  provides  for  the 
deduction  of  "all  losses  actually  sustained  during  the  year, 

ss  Treasury  Decisions,  No.  1763. 

5»  Treasury  Decisions,  No.  1742,  par.  74. 

60  in  re  Gihon's  Estate,  169  N.  Y.  443,  62  N.  E.  561. 

ei  Hooper  v.  Bradford,  178  Mass.  95,  59  N.  E.  678. 

(198) 


Ch.  8)  DEDUCTIONS   AND    ALLOWANCES  §  99 

incurred  in  trade  or  arising  from  losses  by  fire  not  covered 
by  insurance,  or  losses  otherwise  actually  incurred."  These 
phrases,  if  taken  in  their  widest  sense,  might  include  the  loss 
or  impairment  of  capital  assets  by  such  causes  as  bad  in- 
vestments, the  bankruptcy  of  a  debtor,  the  failure  of  a 
bank,  the  enforcement  of  one's  liability  as  indorser,  and  the 
like.  But  bearing  in  mind  the  purpose  of  the  statutes  in 
which  they  occur — to  impose  a  tax  on  incomes,  not  on  prop- 
erty or  capital — and  taking  the  context  into  consideration, 
it  seems  probable  that  a  more  restricted  meaning  should  be 
given  to  them.  Apparently  the  legislative  purpose  was  to 
include  only  those  losses  which  are  incident  to  the  business 
out  of  which  the  taxable  income  is  produced,  or  such  as  in- 
volve the  destruction  or  impairment  of  property  employed, 
or  capital  invested,  in  that  business.  This  is  the  doctrine 
prevailing  in  England,  where  it  is  said:  "Only  such  losses 
can  be  deducted  as  are  connected  with,  in  the  sense  that  they 
are  really  incidental  to,  the  trade  itself.  They  cannot  be  de- 
ducted if  they  are  mainly  incidental  to  some  other  vocation 
or  fall  on  the  trader  in  some  other  character  than  that  of 
trader.  The  nature  of  the  trade  is  to  be  considered,"  so 
that  a  taxpayer  is  not  allowed  to  deduct  a  loss  which  he  has 
sustained  in  being  compelled  to  pay  a  judgment  recovered 
against  him  in  an  action  of  tort,  where  the  circumstances  of 
the  tort  were  not  an  incident  of  his  business.62  Under  the 
English  law  it  is  also  held  that  one  who  carries  on  two  lines 
of  business  cannot  deduct  a  loss  sustained  in  one  from  the 
profits  made  in  the  other.  Thus  a  seed  merchant,  taking  a 
farm  and  working  it  in  connection  with  his  seed  business, 
cannot  claim  any  allowance  from  the  assessment  on  his 
profits  as  seed  merchant  in  respect  of  losses  on  the  farm.68 
But  on  the  other  hand,  a  loss  sustained  by  the  embezzlement 
of  funds  by  an  employe  is  incurred  in  trade,  or  sustained  in 

62  Strong  &  Co.  v.  Woodifield  [1906]  App.  Cas.  448. 

63  Brown  v.  Watt,  23  Scotch  Law  Rep.  403,  2  Tax  Cas.  143. 

(199) 


§  100  INCOME    TAXATION  (Ch.  8 

connection  with  the  income-producing  business,  and  there- 
fore may  be  deducted.64  But  mere  shrinkage  in  value  of 
property  or  other  assets  is  not  properly  to  be  described  as 
a  "loss,"  within  the  meaning  of  the  statutes,  though  an  al- 
lowance for  it  may  be  made  under  the  head  of  '.'deprecia- 
tion." And  so,  loss  due  to  the  voluntary  removal  of  build- 
ings, etc.,  incident  to  the  making  of  improvements,  is  either 
a  proper  charge  to  the  cost  of  the  new  additions  or  to  de- 
preciation already  provided,  as  the  facts  may  indicate,  but 
in  no  case  is  it  a  proper  deduction  in  determining  net  in- 
come, except  as  it  may  be  reflected  in  the  reasonable  amount 
allowable  as  a  deduction  for  depreciation.65  It  will  be  ob- 
served that  losses  cannot  be  deducted  if  compensated  for 
by  insurance  or  otherwise.  But  by  a  reasonable  construction 
of  the  statute  we  should  conclude  that  a  loss  partially  com- 
pensated for  by  insurance  or  otherwise,  if  otherwise  deduct- 
ible, might  be  deducted  to  the  extent  of  the  excess  of  loss 
over  insurance  or  other  compensation  received. 

§  100.     Debts  Written  Off  as  Worthless 

The  federal  income  tax  law  of  1894  allowed  the  deduction 
of  "debts  ascertained  to  be  worthless."  That  of  1913  cop- 
ies this  phrase  with  some  enlargement,  as  follows :  "Debts 
actually  ascertained  to  be  worthless  and  charged  off  during 
the  year."  But  this  applies  only  in  the  case  of  individual 
taxpayers.  In  that  part  of  the  law  which  relates  to  corpo- 
rations there  is  no  corresponding  provision.  This  probably 
results  from  the  fact  that  those  portions  of  the  act  of  1913 
which  relate  to  corporations  were  copied  almost  bodily  from 
the  corporation  tax  law  of  1909  (which  made  no  provision 
for  the  deduction  of  bad  debts)  without  adverting  to  the  re- 
sulting discrimination  between  corporations  and  individuals. 
But  the  act  of  1909  did  contain  a  provision  for  deducting 

•   64  United  States  v.  Central  Nat.  Bank,  10  Fed.  612. 
«6  Treasury  Decisions,  No.  1742,  par.  93. 

(200) 


Ch.  8)  DEDUCTIONS    AND    ALLOWANCES  §  100 

uncompensated  losses,  and  under  this  clause  the  officers  of 
the  treasury  department  ruled  that  bad  debts,  if  so  charged 
off  on  the  company's  books  during  the  year,  were  proper 
deductions,  though,  if  such  debts  were  subsequently  collect- 
ed, they  must  be  accounted  for  as  income.66  It  is  reason- 
able that  a  similar  construction  should  be  applied  to  the  act 
now  in  force.  Under  the  former  income  tax  laws  it  was  held 
that  a  merchant,  in  making  his  statement  of  income,  was 
entitled  to  deduct  from  his  gross  profits  the  bad  debts  made 
during  the  year  to  which  the  statement  related,  or  such  as 
appeared  to  be  uncollectible  at  the  end  of  that  year,  but  not 
debts  which  became  worthless  after  the  expiration  of  that 
year,  although  before  the  date  of  the  return.67 

The  term  "debts"  should  not  be  taken  in  its  broadest 
sense.  It  is  a  term  capable  of  a  wide  variety  of  meanings. 
But  considering  the  connection  in  which  it  is  found  and  the 
general  purpose  of  the  statute,  it  is  apparent  that  it  includes 
only  such  debts  as  arise  in  or  are  connected  with  the  busi- 
ness of  the  year,  or,  in  other  words,  debts  which,  if  they  had 
been  paid,  would  have  constituted  a  part  of  the  year's  tax- 
able income.  Money  owing  to  one  may  constitute  a  part 
of  his  capital,  so  that  its  payment  would  not  swell  his  in- 
come, but  only  change  the  form  of  the  capital.  In  this  case, 
if  it  should  prove  uncollectible,  it  would  not  constitute  a 
proper  deduction.  Thus,  in  an  English  case,  it  appeared 
that  the  company  in  question  carried  on  the  business  of  zinc 
smelting,  and  for  this  purpose  it  required  large  quantities 
of  "blende."  To  supply  the  blende  a  new  company  was 
formed,  which  from  time  to  time  received  assistance  from 
the  smelting  company  in  the  form  of  advances  on  loan. 
The  new  company  proving  unsuccessful  and  going  into  liq- 
uidation, the  amount  due  from  it  to  the  smelting  company 

««  Treasury  Decisions,  No.  1742,  par.  75. 

67  United  States  v.  Mayer,  Deady,  127,  Fed.  Cas.  No.  15,753. 

(201) 


§  101  INCOME   TAXATION  (Ch.  8 

was  written  off  as  a  bad  debt.  But  it  was  held  that  the  ad- 
vances were  an  investment  of  capital,  and  that  the  loss  was 
not  deductible  in  estimating  the  profits  of  the  company  for 
assessment  under  the  income  tax.68  On  the  other  hand, 
where  a  brewing  company  made  loans  to  its  customers  on 
the  security  of  public  houses,  and  if  the  security  did  not 
realize  the  amount  of  the  loan,  the  company  wrote  off  the 
loss  as  a  bad  debt,  it  was  held  that,  in  arriving  at  its  profits 
for  assessment  to  income  tax,  the  company  was  entitled  to 
deduct  the  amount  of  such  losses  as  worthless  debts.69 

§  101.     Depreciation  of  Property 

The  act  of  Congress  of  1913  provides,  in  the  case  of  an  in- 
dividual taxpayer,  for  a  deduction  from  his  return  of  income 
for  assessment  of  "a  reasonable  allowance  for  the  exhaustion, 
wear  and  tear  of  property,  arising  out  of  its  use  or  employ- 
ment in  the  business,"  and  in  the  case  of  a  corporation  "a  rea- 
sonable allowance  for  depreciation  by  use,  wear  and  tear  of 
property,  if  any."  According  to  the  plain  import  of  these 
terms,  an  allowance  for  depreciation  can  be  claimed  only  in 
respect  to  tangible  property  which  is  directly  employed  in 
the  production  of  the  income  taxed,  such  as  buildings,  ma- 
chinery, furniture  and  fixtures,  ships,  vehicles,  rolling  stock 
and  roadbed,  and  the  like.  For  the  language  of  the  act  only 
applies  to  property  which  is  "used"  or  "employed"  in  busi- 
ness, and  which,  in  the  process  of  such  use,  is  subject  to  "ex- 
haustion" or  "wear  and  tear."  In  this  respect  the  act  exhibits 
a  departure,  in  the  way  of  greater  strictness,  from  the  terms 
of  the  corporation  tax  law  of  1909,  which  allowed  a  deduc- 
tion of  "a  reasonable  allowance  for  depreciation  of  property, 
if  any."  In  accordance  with  the  latter  and  broader  phrase, 
the  Wisconsin  statute,  both  in  the  case  of  individuals  and  cor- 
es English  Crown  Spelter  Co.  v.  Baker,  99  Law  T.  353,  5  Tax  Cas. 
327. 

e»  Reid's  Brewery  Co.  v.  Male  [1891]  2  Q.  B.  1,  3  Tax  Cas.  279. 

(202) 


Ch.  8)  DEDUCTIONS   AND   ALLOWANCES  §  101 

porations,  provides  for  "a  reasonable  allowance  for  deprecia- 
tion of  the  property  from  which  the  income  is  derived." 

Depreciation  is  a  well-known  and  important  item  in  all 
modern  corporation  accounting.  And  in  estimating  the  net 
profits  of  any  business,  this  item  must  be  reckoned  with, 
either  by  figuring  a  corresponding  reduction  in  the  value  of 
capital  assets,  by  the  creation  of  a  surplus  or  reserve  fund  for 
the  eventual  replacement  of  the  plant  or  such  portions  of  it  as 
will  become  exhausted,  or  by  the  expenditure  of  current  earn- 
ings in  the  restoration  of  machinery  or  other  property  which 
has  been  impaired  or  has  deteriorated  by  use.  In  the  latter 
case,  there  is  no  shrinkage  in  the  value  of  assets,  but  there  is 
an  annual  expenditure  over  and  above  the  ordinary  operating 
expenses.  And  under  the  income  tax  law,  it  is  ruled  that 
depreciation,  to  be  an  allowable  deduction  in  the  return  of 
annual  net  income  of  a  corporation,  must  be  charged  off  on 
the  ledger  of  the  corporation,  so  as  to  show  a  reduction  in 
its  capital  assets  to  the  extent  of  the  depreciation  claimed.70 
In  other  words,  if  a  corporation  expends  money  in  repairing 
or  replacing  depreciated  property,  it  may  claim  an  allowance 
therefor  under  the  head  of  repairs  or  expenses  of  the  business, 
but  in  that  case  will  not  be  entitled  to  claim  also  for  deprecia- 
tion. The  question  of  what  is  a  "reasonable  allowance"  for 
depreciation  is  one  depending  on  the  circumstances  of  each 
particular  case,  and  if  the  amount  of  the  tax  to  be  paid  is 
brought  into  litigation,  it  is  to  be  determined  as  a  question  of 
fact  on  the  evidence.71  The  general  rule  prescribed  by  the 
Commissioner  of  Internal  Revenue  under  the  corporation  tax 
law  of  1909  was  as  follows :  "The  deduction  for  depreciation 
should  be  the  estimated  amount  of  the  loss,  accrued  during  the 
year  to  which  the  return  relates,  in  the  value  of  the  property 
in  respect  of  which  such  deduction  is  claimed,  that  arises  from 
exhaustion,  wear  and  tear,  or  obsolescence  out  of  the  uses 

TO  Treasury  Decisions,  No.  1742,  par.  83. 

7i  United  States  v.  Nipissing  Mines  Co.,  202  Fed.  803. 

(203) 


§101  INCOME    TAXATION  (Ch.  8 

to  which  the  property  is  put,  and  which  loss  has  not  been  made 
good  by  payments  for  ordinary  maintenance  and  repairs  de- 
ducted under  the  heading  of  expenses  of  maintenance  and  op- 
eration or  in  the  ascertainment  of  gross  income.  This  esti- 
mate should  be  formed  upon  the  assumed  life  of  the  property, 
its  cost  value,  and  its  use.  Expenses  paid  in  any  one  year  in 
making  good  exhaustion,  wear  and  tear,  or  obsolescence  in 
respect  of  which  any  deduction  for  depreciation  is  claimed 
must  not  be  included  in  the  deduction  for  expenses  of  mainte- 
nance and  operation  of  the  property  or  in  the  ascertainment 
of  gross  income,  but  must  be  made  out  of  accumulative  allow- 
ances deducted  for  depreciation  in  current  and  previous 
years."  72 

The  application  of  a  general  rule  of  this  kind  to  a  concrete 
case  is  well  illustrated  in  a  Scotch  case,  which  concerned  the 
method  of  figuring  the  deduction  to  be  allowed  for  annual 
wear  and  tear  of  such  a  piece  of  property  as  a  steamship.  It 
was  said  that  the  proper  method  is  to  take  the  average  life 
of  such  a  property  (here  estimated  at  22  years),  and  over  that 
period  spread  the  whole  original  cost,  allowing  for  each  year 
a  deduction  equal  to  the  quotient  obtained  by  dividing  such 
cost  by  such  number  of  years,  without  taking  into  account  the 
value  of  the  use  of  the  money  so  annually  allowed  by  way  of 
deduction,  or  considering  what  the  owner  may  do  with  it. 
The  method  pursued  by  the  commissioners  of  inland  revenue 
in  this  case  was  to  calculate  the  sum  which,  being  allowed 
annually  and  placed  at  interest,  would  amount  to  the  original 
cost  of  the  vessel  at  the  end  of  the  22  years,  thus  in  effect 
requiring  the  owrler  to  establish  a  sinking  fund  and  keep  it 
invested,  or  to  amortize  the  value  of  his  property  by  the 
growth  of  a  fund  for  its  replacement.  But  this  the  court  held 
to  be  incorrect.78 

72  Internal  Revenue  Regulations,  No.  31,  art.  4. 

73  Leith,  Hull  &  Hamburg  Steam  Packet  Co.  v.  Inland  Revenue,  1 
Sess.  Cas.  Scotch  (1899)  1117.    Further  as  to  the  allowance  for  de- 

(204) 


Ch.  8)  DEDUCTIONS    AND    ALLOWANCES  §  101 

In  the  case  of  an  income  derived  from  the  rent  of  a  build- 
ing— such  as  a  dwelling,  an  apartment  house,  a  hotel,  a  store, 
or  an  office  building — no  decision  has  apparently  yet  been  ren- 
dered concerning  the  right  of  the  owner  to  claim  a  deduction 
for  depreciation.  But  applying  the  principles  established  in 
other  cases,  it  may  be  stated  in  the  first  place,  that  a  claim 
should  not  be  allowed  both  for  repairs  and  for  depreciation, 
if  the  repairs  make  good  the  depreciation.  But  secondly,  such 
a  property  is  clearly  subject  to  "wear  and  tear,"  and  diminishes 
in  value  thereby,  and  its  average  life  should  be  susceptible  of 
calculation  to  a  fair  degree  of  certainty,  considering  not  only 
its  gradual  physical  impairment,  but  also  the  increasing  diffi- 
culty of  continuing  to  obtain  the  same  rent  for  it  as  it  becomes 
more  and  more  old-fashioned  or  unsuited  to  modern  require- 
ments. On  the  question  of  obsolescence  as  an  element  of  de- 
preciation, however,  we  shall  have  more  to  say  in  a  later  par- 
agraph. 

If  an  allowance  for  depreciation  can  be  applied  to  anything 
else  than  tangible  property  employed  in  the  business,  then  an 
interesting  question  arises  concerning  shrinkage  in  the  market 
value  of  stocks,  bonds,  and  other  investments.  As  above  stat- 
ed, the  act  of  Congress  now  in  force  would  exclude  such  a 
case,  if  read  literally.  But  it  was  held  otherwise  under  the 
somewhat  broader  terms  of  the  act  of  1909.  The  treasury  de- 
partment ruled  that  premiums  on  stocks  and  bonds  arbitrarily 
charged  off  on  the  books  of  a  corporation  did  not  constitute 
a  proper  deduction  on  account  of  depreciation,  unless  there 
had  been  an  actual  shrinkage  in  value  of  such  securities  to  the 
extent  of  the  reduction  claimed  during  the  year  for  which  the 
return  was  made.74  The  language  of  the  Wisconsin  statute, 
in  this  particular,  is  practically  the  same  as  that  of  the  act 
of  Congress  of  1909.  But  its  construction  has  not  been  ju- 

preciation  in  the  case  of  steamships,  see  Cunard  S.  S.  Co.  v.  Coul- 
son  [1899]  1  Q.  B.  865. 

74  Treasury  Decisions,  No.  1742,  par.  87. 

(205) 


§  101  INCOME   TAXATION  (Ch.  8 

dicially  settled,  and  the  revenue  officers  of  that  state  tentatively 
hold  that  it  was  not  intended  to  apply  to  the  case  of  diminish- 
ing market  value  of  intangible  property  such  as  corporate 
stocks  or  bonds,  while  suggesting  an  amendment  to  the  stat- 
ute in  the  interest  of  greater  clarity  of  expression.75 

The  question  of  allowing  for  depreciation  in  the  case  of 
property  which,  though  not  physically  impaired,  has  become 
obsolete  is  one  of  great  difficulty.  Undoubtedly,  a  business 
property  diminishes  in  value  unless  it  is  kept  up  to  the  standard 
of  efficiency  set  by  new  inventions,  new  appliances,  and  new 
methods,  since  it  cannot  otherwise  successfully  compete  with 
its  better-equipped  rivals.  And  in  a  broad  sense,  this  is  clearly 
"depreciation."  But  it  is  not  depreciation  by  reason  of  "wear 
and  tear,"  or  by  reason  of  its  use  in  the  business.  And  so 

™  "Deductions  for  losses  under  other  income  tax  laws  have  gener- 
ally been  confined  to  damage  to  or  destruction  of  physical  property 
of  the  taxpayer,  and  bad  accounts  which  had  previously  been  re- 
ported as  income.  Losses  resulting  from  fluctuation  in  market  val- 
ue have  not  been  allowed.  Various  claims  have  been  made  for  loss- 
es under  the  paragraph  quoted,  including  depreciation  in  the  value 
of  corporate  stocks  and  other  like  property  resulting  from  change 
in  market  value  or  destruction  of  or  damage  to  the  physical  proper- 
ty of  the  corporation  issuing  the  stock.  Considered  as  a  whole,  the 
income  tax  act  does  not  seem  to  contemplate  the  assessment  of  appre- 
ciation in  value  until  actually  realized  by  sale  or  other  disposition  of 
the  property.  It  would  seem  to  follow  that  depreciation  should  not 
be  allowed  in  such  cases  until  the  amount  of  the  loss  is  determined  in 
like  manner.  Following  the  English  decisions  and  the  precedents 
of  the  internal  revenue  department  under  the  income  tax  of  1863,  and 
the  rules  prescribed  for  administration  of  the  income  tax  of  1894, 
the  Commission  felt  compelled  to  deny  deductions  for  depreciation 
of  this  character  while  the  property  was  still  held  by  the  taxpayer. 
The  soundness  of  this  construction  has  been  sharply  challenged,  and 
the  law  on  the  subject  is  not  entirely  clear.  If  the  purpose  of  the 
legislature  is  to  confine  deductions  for  losses  as  above  indicated,  the 
statute  should  be  amended  so  as  to  more  clearly  express  that  in- 
tention. If,  on  the  other  hand,  a  wider  range  of  deduction  is  deemed 
advisable,  there  is  equal  reason  for  making  the  statute  more  specific. 
The  subject  is  properly  one  for  the  consideration  of  the  legislature 
and  attention  is  called  to  it  for  that  reason."  Report  of  Wisconsin 
State  Tax  Commission,  1912,  p.  49. 

(206) 


Ch.  8)  DEDUCTIONS   AND    ALLOWANCES  §  102 

the  decisions  under  income  tax  laws,  in  so  far  as  they  have 
adverted  to  this  point,  tend  to  the  application  of  a  stricter  rule. 
Thus,  in  an  English  case  it  was  held  that  depreciation  on  ac- 
count of  wear  and  tear  does  not  include  the  loss  on  apparatus 
which  is  discarded  because  it  has  become  old-fashioned  or 
obsolete,  as  in  the  case  where  a  street  railway  company  chang- 
es its  motive  power  from  horse  power  to  electric  power,  and 
thereupon  is  obliged  to  take  up  and  cast  aside  the  rails  in  use, 
which,  though  not  worn  out,  cannot  be  used  for  the  new 
track.76  So  again,  under  the  English  statute,  which  allows  a 
deduction  for  "diminished  value  by  reason  of  wear  and  tear 
during  the  year  of  any  machinery  or  plant,"  it  was  ruled  that 
the  owners  of  a  ship  engaged  in  trade  were  not  entitled  to  a 
deduction  for  depreciation  in  the  value  of  their  vessel  caused 
by  the  building  of  ships  of  a  better  construction  or  better 
equipped,  though  this  circumstance  rendered  their  own  proper- 
ty less  desirable  for  the  use  of  charterers  and  so  diminished 
its  earning  power.77 

Finally,  it  has  been  ruled  that  "good  will"  represents  the 
value  attached  to  a  business  over  and  above  the  value  of  the 
physical  property,  and  is  such  an  entirely  intangible  asset  that 
no  claim  for  depreciation  in  connection  therewith  can  be  al- 
lowed.78 

§  102.     Depletion  of  Ores  or  Other  Natural  Deposits 

It  has 'been  a  vexed  question  whether  or  not  a  company  en- 
gaged in  the  business  of  mining  coal,  ores  of  gold  or  silver,  or 
other  natural  deposits,  should  be  allowed  to  deduct  from  its 
income  as  returned  for  assessment,  under  the  head  of  depre- 
ciation, an  amount  representing  the  diminution  in  the  value  of 
its  property  caused  by  the  extraction  of  ores  during  the  year. 

76  London  County  Council  v.  Edwards,  5  Tax  Gas.  383. 
"  Burnley  Steamship  Co.  v.  Aikin,  31  Scotch  Law  Rep.  803,  3  Tax 
Gas.  275. 

78  Treasury  Decisions,  No.  1742,  par.  82. 

(207) 


§  102  INCOME   TAXATION  (Ch.  8 

Two  American  decisions  and  one  English  case  have  ruled 
that  this  was  not  admissible.79  But  other  decisions  (in  both 
countries)  have  maintained  that  such  a  deduction  should  be 
allowed,  on  the  ground  that  a  mining  property  is  valuable 
only  for  the  minerals  which  it  contains,  that  its  value  constant- 
ly decreases  as  the  minerals  are  extracted,  until  it  reaches  the 
vanishing  point  at  the  time  when  the  mineral  deposits  are  ex- 
hausted, and  that  each  year's  operations  causes  a  shrinkage 
in  the  value  of  the  property  equal  to  the  value  (value  in  place) 
of  the  ores  taken  out,  which  is  properly  described  as  a  "de- 
preciation." 80  And  this  rule  was  also  adopted  by  the  officers 
of  the  internal  revenue  bureau.81  So  far  as  concerns  taxation 
under  the  federal  statute,  this  question  is  set  at  rest  by  the 
terms  of  the  act  of  1913,  which  includes  under  the  head  of 
allowance  for  depreciation  "in  the  case  of  mines,  a  reasonable 
allowance  for  depletion  of  ores  and  all  other  natural  deposits, 
not  to  exceed  five  per  centum  of  the  gross  value  at  the  mine 
of  the  output  for  the  year  for  which  the  computation  is  made." 
The  same  rule  will  apply  to  the  case  of  natural  gas  companies 
and  those  sinking  oil  wells.  And  under  the  corporation 
tax  law  of  1909,  the  administrative  officers  ruled  that  natural 
gas  companies  should  be  allowed  to  make  deductions  for  de- 
preciation on  the  basis  of  the  gradual  exhaustion  of  their  de- 
posits, and  prescribed  elaborate  instructions  for  reckoning  this 
depreciation,82  which  was  also  done  with  reference  to  com- 

7»  Commonwealth  v.  Ocean  Oil  Co.,  59  Pa.  St.  61 ;  Stratton's  In- 
dependence v.  Howbert  (U.  S.  Dist  Ct.  D.  Colo.,  1912)  207  Fed.  , 

reported  in  Treasury  Decisions,  No.  1796 ;  Alianza  Co.  v.  Bell  [1906] 
App.  Gas.  18. 

so  United  States  v.  Nipissing  Mines  Co.,  202  Fed.  803;  Knowles  v. 
McAdam,  L.  R.  3  Ex.  Div.  23,  1  Tax  Cas.  161. 

si  Treasury  Decisions,  No.  1742,  par.  97. 

82  "For  the  purpose  of  enabling  corporations  engaged  in  the  pro- 
duction and  transportation  of  natural  gas  to  properly  gauge  depre- 
ciation of  investment  in  the  field  and  main  line  divisions  on  ac- 
count of  depletion  to  be  deducted  each  year,  in  making  their  annual 
return  of  net  income,  the  following  methods  are  recommended: 

"First.  That  the  producing  gas  area  of  said  company  be  laid  off 

(208) 


Ch.  8)  DEDUCTIONS   AND    ALLOWANCES  §  102 

panics  operating  petroleum  producing  properties.88  Apparent- 
ly the  same  principle  might  justly  be  applied  to  the  case  of 
income  derived  from  timber  lands,  if  the  property  were  not 

in  squares  not  exceeding  one  square  mile,  and  that  three  months  pri- 
or to  September  30  of  each  year,  one  or  more  representative  wells 
be  shut  in  in  each  square  or  territory,  and  that  as  of  September  30 
an  accurate  gauge  be  taken  of  the  rock  pressure  of  said  wells,  and 
the  decline  in  the  average  rock  pressure  from  year  to  year  shall  be 
considered  as  the  base  of  determining  the  exhaustion  of  deposit.  For 
instance,  a  corporation  may  have  80  square  miles  of  territory,  and 
the  average  rock  pressure  September  30,  1909,  may  have  been  600 
pounds  per  square  inch.  On  September  30,  1910,  the  average  rock 
pressure  may  have  been  540  pounds,  or  a  decline  of  10  per  cent,  and 
this  percentage  is  to  be  applied  as  a  basis  of  depreciation  for  the 
year  1910  on  the  cost  of  the  field  and  main  line  divisions,  less  depre- 
ciation charged  off  prior  to  that  date  and  any  salvage  value  that 
may  remain  in  the  property. 

"Second.  If  by  reason  of  lack  of  area  or  for  any  other  good  and 
sufficient  reason,  any  corporation  engaged  in  the  production  of  gas 
shall  prefer  the  'volume  basis'  as  more  accurately  reflecting  the 
rate  of  exhaustion  of  deposits,  the  amount  of  capital  invested  to  be 
returned  out  of  the  income  of  any  given  year  may  be  determined  on 
that  basis.  In  case  the  'volume  basis'  is  adopted,  the  volume  of  each 
well  must  be  taken  with  instruments  generally  recognized  as  relia- 
ble for  determining  the  daily  volume  produced  by  each  well  at 
stated  periods  each  year,  and  the  percentage  of  loss  in  daily  pro- 
duction shall  determine  the  percentage  of  the  capital  investment 
which  shall  be  returnable  out  of  gross  income  and  the  proper  de- 
duction to  be  made  each  year  in  the  return  of  annual  net  income 
as  return  of  capital  invested. 

"Any  unreturned  cash  investment  remaining  when  wells  or  terri- 
tory have  to  be  abandoned  or  lines  taken  up  because  of  failure  of 
the  supply  of  gas,  less  salvage,  may  be  deducted  as  part  of  the  rea- 
sonable depreciation  for  the  year  in  which  such  territory  is  aban- 
doned, unless  such  values  shall  have  been  returned  in  the  reduction 
made  because  of  loss  of  volume  or  decrease  in  rock  pressure,  which 
in  such  case  would  be  considered  as  having  reached  the  vanishing 
point"  Treasury  Decisions,  No.  1754. 

sa  "In  the  ascertainment  of  net  income  deduction  will  be  allowed 
for  depreciation  arising  from  exhaustion  of  deposits  and  for  depre- 
ciation and  obsolescence  of  improvements  in  accordance  with  the 
general  regulations  respecting  depreciation  allowances,  on  the  basis 
of  the  original  capital-investment  cost,  reduced  to  a  cash  basis,  of 
the  properties  concerned  to  the  company  reporting.  Claims  for  de- 
preciation on  account  of  depletion  of  deposits  based  on  any  values 

BL.INC.TAX.— 14  (209) 


§  102  INCOME   TAXATION  (Ch.  8 

otherwise  valuable.  The  point  seems  not  to  have  been  ad- 
judged. But  the  treasury  department  has  ruled  that  the  mere 
removal  of  timber  by  cutting  from  timber  lands,  unless  the 
timber  is  disposed  of  through  sales  or  plant  operations,  is  to 
be  considered  simply  as  a  change  in  the  form  of  assets ;  but  if 
the  timber  is  disposed  of  through  sales  or  otherwise,  it  is  to 
be  accounted  for  in  accordance  with  the  regulations  govern- 
ing the  disposition  of  capital  and  other  assets.84 

other  than  the  cost  of  the  property  in  cash  or  cash  values  (includ- 
ing cost  of  development)  will  not  be  considered, 

"In  all  producing  oil  fields  an  average  value  per  barrel  of  the  set- 
tled daily  production  shall  be  adopted  as  the  guide  in  determining 
the  value  of  the  property,  and  the  following  method  of  depreciating 
said  values  is  recommended : 

"Each  corporation  will  fix  this  valuation  per  barrel  as  of  January 
1,  1909,  or  upon  the  date  of  commencement  of  production,  if  after 
that  date,  for  ascertaining  the  deductions  for  depreciation  on  the 
basis  of  depletion  of  deposits.  This  valuation  per  barrel  should 
be  based  on  the  cost  of  the  property  to  the  corporation  plus  the 
cost  of  the  development  thereof  with  a  proper  deduction  from  that 
valuation  for  the  number  of  years  the  property  has  been  in  opera- 
tion, and  the  resulting  proportioned  decrease  in  daily  production  of 
oil.  With  this  basis  per  barrel  fixed  as  of  January  1,  1909,  or  at  the 
date  of  commencement  of  production,  if  after  January  1,  1909,  the 
value  of  the  property  as  a  whole  is  to  be  determined  by  applying  this 
unit  value  per  barrel  to  the  daily  average  production  for  the  month 
of  December,  or  other  representative  month,  in  the  year  for  which 
the  return  is  made.  The  representative  month  chosen  shall  be  the 
same  in  each  year.  This  unit  valuation  per  barrel  is  to  be  retained 
in  arriving  at  all  future  depreciation  deductions,  except  where  an 
additional  production  is  secured  by  drilling  or  an  additional  pro- 
duction is  acquired  by  purchases,  in  which  cases  a  new  average  rate 
per  barrel  based  upon  the  actual  cash  invested  in  such  development, 
or  in  the  new  properties  and  their  development,  may  be  adopted. 
The  amount  of  income  each  year  to  be  applied  to  the  return  of 
the  cash  investment  shall  be  ascertained  by  multiplying  the  unit  val- 
uation ascertained  as  required  above  by  the  difference  between  the 
daily  average  production  in  barrels  during  the  representative  month 
of  each  year.  The  product  of  such  multiplication  will  be  the  amount 
deductible  from  gross  income  on  account  of  return  of  cash  invest- 
ment based  upon  the  rate  of  depletion  of  deposits."  Treasury  Deci- 
sions, No.  1755. 

s*  Treasury  Decisions,  No.  1742,  par.  91. 

(210) 


Ch.  8)  DEDUCTIONS   AND   ALLOWANCES  §  103 

§  103.     Amortization  of  Bonds 

Closely  connected  with  the  subject  of  depreciations  is  the 
rule  or  principle  of  the  amortization  of  various  forms  of  se- 
curities, and  particularly  corporate  bonds.  This  principle  is 
well  explained  by  a  court  in  New  York,  as  follows:  "It  is  a 
common  matter  with  bankers  and  dealers  in  stocks  to  com- 
pute, by  the  aid  of  tables,  what  the  actual  income  is  of  a  stock 
running  a  certain  definite  time,  for  which  a  certain  premium 
is  paid.  The  actual  income  is  plainly  less  than  the  amount 
yearly  received,  because  the  premium  paid  must  be  so  dis- 
tributed, in  the  calculation,  over  the  time  the  stock  has  to  run, 
that  the  owner  at  the  end  of  the  time  will  have  his  original 
investment  unimpaired.  Otherwise,  though  he  may  not  no- 
tice this,  he  will  have  been  gradually  impairing  his  capital,  in 
fact,  using  it  up  in  the  form  of  income.  The  rule  is  that  so 
much  out  of  the  moneys  received  annually  on  these  bonds  shall 
be  treated  as  income  as,  according  to  the  computations  and 
tables  above  mentioned,  they  are  found  to  produce.  The  res- 
idue belongs  to  principal,  and  annually  added  thereto  will  make 
up  for  the  gradual  depreciation  which  must  come  as  the  bonds 
approach  maturity,  and  will  keep  the  fund  unimpaired  when 
they  are  paid  off."  86  Thus,  if  a  trustee  under  a  will,  who 
holds  a  fund  in  trust  to  pay  the  income  to  a  person  during  his 
life,  with  remainder  over,  makes  an  investment  in  bonds,  which 
are  payable  at  a  day  certain  and  are  bought  at  a  premium,  he 
is  not  obliged  to  pay  the  entire  net  income  to  the  tenant  for 
life,  but  is  entitled  to  deduct  such  an  amount  from  the  actual 
interest  received  on  each  bond  as  will,  by  successive  deduc- 
tions, make  good  to  the  capital  the  amount  of  the  premium 
paid  upon  the  original  purchase  of  the  bond,  without  regard  to 
the  market  value  of  the  bond  at  the  time  of  making  such  de- 
ductions.88 And  under  the  corporation  tax  law  of  1909,  the 

85  People  v.  Davenport,  30  Hun  (N.  Y.)  177. 

se  New  England  Trust  Co.  v.  Eaton,  140  Mass.  532,  4  N.  E.  69,  54 
Am.  Rep.  493. 

(211) 


§  104  INCOME   TAXATION  (Ch.  8 

officers  of  the  internal  revenue  bureau  considered  this  gradual 
diminution  in  the  market  value  of  a  bond  (originally  bought 
at  a  premium)  as  its  maturity  approaches,  in  the  light  of  a 
"depreciation"  of  property,  and  made  the  following  ruling  in 
regard  to  it:  "Relative  to  amortization  of  bonds,  where  a 
corporation  holds  bonds  which  were  purchased  at  a  rate  above 
par,  and  said  corporation  shall  proportionately  reduce  the  val- 
ue of  those  bonds  on  its  books  each  year,  so  that  the  book 
value  shall  be  the  redemption  value  of  the  bonds  when  such 
bonds  become  due  and  payable,  the  return  of  annual  net  in- 
come of  the  corporation  holding  such  bonds  may  show  the  de- 
preciation on  account  of  amortization  of  such  bonds.  The 
requirement  is,  however,  that  the  amount  carried  to  the  amorti- 
zation account  each  year  shall  be  practically  proportioned  with 
respect  to  the  difference  between  the  purchase  price  and  the 
maturing  value  and  the  number  of  years  to  elapse  until  the 
bonds  become  due  and  payable.  With  respect  to  bond  issues, 
where  such  bonds  are  disposed  of  for  a  price  less  than  par 
and  are  redeemable  at  par,  it  is  also  held  that,  because  of  the 
fact  that  such  bonds  must  be  redeemed  at  their  face  value, 
the  loss  sustained  by  reason  of  their  sale  for  less  than  their 
face  value  may  be  prorated  by  the  issuing  corporation  in  ac- 
cordance with  the  life  of  the  bond."  87 

§  104.     Dividends  from  Corporations  Subject  to  Tax 

In  order  to  avoid  double  taxation,  it  is  customary  for  the 
income  tax  laws  to  allow  the  deduction  of  dividends  received 
from  corporations  liable  to  the  tax,  or  which  have  been 
assessed  for  it.  In  the  act  of  Congress  of  1909,  the  deduction 
was  allowed  of  all  amounts  received  within  the  year  as  divi- 
dends on  the  stock  of  any  corporation  "subject  to  the  tax." 
And  an  opinion  was  given  by  the  Attorney  General  that,  in 

*i  Treasury  Decisions,  No.  1727. 
(212) 


Ch.  8)  DEDUCTIONS   AND    ALLOWANCES  §  104 

computing  the  income  of  a  corporation  for  the  purpose  of 
taxation  under  that  act,  the  dividends  received  by  it  as  a 
stockholder  in  any  other  corporation  of  a  character  to  which 
the  act  applied  should  be  deducted  from  its  gross  earnings, 
although  the  dividend-paying  corporation  had  not  a  sufficient 
net  income  to  be  taxable  itself,  for  if  such  corporation  was 
of  the  character  described  in  the  act  (that  is,  not  among  those 
exempted  entirely),  it  was  "subject  to  the  tax  imposed"  al- 
though its  income  for  any  given  year  might  not  reach  the  taxa- 
ble limit.88  The  act  of  1913,  as  applied  to  the  individual  tax- 
payer, allows  the  deduction  of  "the  amount  received  as  divi- 
dends upon  the  stock  or  from  the  net  earnings  of  any  corpora- 
tion, joint  stock  company,  association,  or  insurance  company 
which  is  taxable  upon  its  net  income  as  hereinafter  provided." 
But,  whether  from  inadvertence  or  by  design,  there  is  no 
similar  provision  in  the  case  of  corporations,  so  that  corpora- 
tions, as  distinguished  from  individuals,  will  not  be  allowed 
to  deduct  dividends  received  from  other  companies.  This 
bears  with  special  rigor  upon  "holding"  companies,  and  this 
circumstance  may  have  been  influential  in  the  mind  of  Con- 
gress in  framing  the  provision. 

In  the  Wisconsin  income  tax  law,  the  provision  on  this 
subject  is  both  more  comprehensive  and  more  explicit,  and 
applies  alike  to  individual  taxpayers  and  corporations.  It  au- 
thorizes the  deduction  of  "dividends  or  income  received  within 
the  year  from  stocks  or  interest  in  any  firm,  copartnership, 
or  corporation,  joint  stock  company  or  association,  the  income 
of  which  shall  have  been  assessed  under  the  provisions  of  this 
act."  In  Hawaii,  the  provision  is  that  "in  assessing  the  income 
of  any  person  or  corporation,  there  shall  not  be  included  the 
amount  received  from  any  corporation,  as  dividends  upon 
the  stock  of  such  corporation,  if  the  tax  of  two  per  cent 

ss  28  Opin.  Atty.  Gen.  140. 

(213) 


§  105  INCOME   TAXATION  (  Ch.  8 

has  been  assessed  upon  its  net  profits  by  said  corporation  as 
required  by  this  act." 

§  105.     Special  Rules  as  to  Insurance  Companies 

The  act  of  Congress  of  1913  allows  a  deduction,  in  the  case 
of  insurance  companies  of  "sums  other  than  dividends  paid 
within  the  year  on  policy  and  annuity  contracts."  This  covers 
the  ordinary  outgo  of  an  insurance  company  in  the  way  of 
payments  of  losses  under  its  policies  and  periodical  payments 
made  to  beneficiaries  under  annuity  contracts.  But  special 
provision  is  also  made  for  companies  doing  business  on  the 
mutual  plan.  In  the  case  of  mutual  life  insurance  companies, 
they  "shall  not  include  as  income  in  any  year  such  portion  of 
any  actual  premium  received  from  any  individual  policy 
holder  as  shall  have  been  paid  back  or  credited  to  such  in- 
dividual policy  holder,  or  treated  as  an  abatement  of  premium 
of  such  individual  policy  holder,  within  such  year."  In  the 
case  of  mutual  fire  insurance  companies,  they  are  likewise  en- 
titled to  deduct  "any  portion  of  the  premium  deposits  returned 
to  their  policy  holders,  but  shall  return  as  taxable  income 
all  income  received  by  them  from  all  other  sources  plus  such 
portions  of  the  premium  deposits  as  are  retained  by  the  com- 
panies for  purposes  other  than  the  payment  of  losses  and  ex- 
penses and  reinsurance  reserves."  As  to  mutual- marine  in- 
surance companies,  the  direction  is  that  they  "shall  include 
in  their  return  of  gross  income  gross  premiums  collected  and 
received  by  them  less  amounts  paid  for  reinsurance,  but  shall 
be  entitled  to  include  in  deductions  from  gross  income 
amounts  repaid  to  policy  holders  on  account  of  premiums 
previously  paid  by  them  and  interest  paid  upon  such  amounts 
between  the  ascertainment  thereof  and  the  payment  thereof." 
This  act  also  allows  the  deduction  of  "the  net  addition,  if 
any,  required  by  law  to  be  made  within  the  year  to  reserve 
funds,"  and  provides  that,  "in  the  case  of  assessment  insurance 

(214) 


Ch.  8)  DEDUCTIONS   AND    ALLOWANCES  §  105 

companies,  whether  domestic  or  foreign,  the  actual  deposit  of 
funds  with  state  or  territorial  officers,  pursuant  to  law,  as  ad- 
ditions to  guarantee  or  reserve  funds,  shall  be  treated  as 
being  payments  required  by  law  to  reserve  funds." 

Aside  from  the  matter  of  reserve  funds  required  by  law, 
it  has  been  a  vexed  question  whether  or  not  an  insurance 
company  could  claim  a  deduction  in  respect  to  premiums  cov- 
ering a  risk  which  extends  beyond  the  end  of  the  fiscal  year. 
In  an  English  case,  a  fire  insurance  company  set  up  a  claim 
to  deduct  a  portion  of  its  premium  receipts  for  the  year, 
representing  the  unearned  or  unexhausted  portion  of  such 
premiums,  where  it  remained  liable  on  the  policies  for  one  or 
several  years  longer.  The  company  contended  that  such  a 
deduction  should  be  allowed  to  it  either  as  a  fixed  percentage 
of  the  total  premium  receipts  (suggesting  one-third  as  a  proper 
proportion),  or  else  to  the  extent  of  the  amount  which  it 
would  cost  to  reinsure  its  unexpired  risks.  But  the  court  held 
otherwise.  Conceding  that  it  would  be  impossible  to  ascer- 
tain the  true  net  profits  of  an  insurance  company  in  this  situa- 
tion with  such  mathematical  accuracy  as  to  do  perfect  and  ab- 
solute justice,  it  was  held  that  the  fair  and  proper  method 
is  to  take  on  the  one  side  the  whole  receipts,  and  on  the  other 
side  the  whole  expenditure  and  disbursements,  for  the  given 
year,  the  balance  remaining  being,  for  the  time  at  least,  net 
profits  on  which  the  income  tax  should  be  assessed.  This 
being  done  year  by  year,  there  is  an  absolute  balancing  of 
accounts ;  and  if  any  wrong  is  done  by  losses  afterwards  oc- 
curring in  respect  of  premiums  on  which,  as  profits,  the  in- 
come tax  has  been  assessed  and  paid,  it  will  be  taken  into 
consideration  in  the  ensuing  year.89  And  later  an  exactly 
similar  decision  was  rendered  by  the  Court  of  Appeal.90  But 

8»  Imperial  Fire  Ins.  Co.  v.  Wilson,  35  Law  T.  271,  1  Tax  Cas.  71. 
»o  General  Accident,  etc.,  Co.  v.  McGowan  [1908]  App.  Cas.  207,  5 
Tax  Cas.  308. 

(215) 


§  106  INCOME   TAXATION  (Ch.  8 

only  four  years  afterwards,  the  same  court  ruled  that  the 
profits  of  a  fire  insurance  company,  for  the  purpose  of  the 
income  tax,  are  not  to  be  computed  by  merely  deducting  the 
total  of  losses  and  disbursements  for  the  year  from  the  total 
premium  receipts  for  the  same  period,  but  allowance  must 
be  made  for  outstanding  policies  at  the  end  of  the  year,  or 
for  the  unearned  portion  of  premiums  received,  which  may  be 
done  by  deducting  a  fair  and  reasonable  percentage  of  the 
year's  premium  receipts.91  Substantially  the  same  view  was 
taken  by  the  internal  revenue  officers  in  construing  the  act  of 
Congress  of  1909,  for  it  was  ruled  that  unearned  premiums 
set  aside  by  insurance  companies  as  reserves  should  not  be 
included  as  income  until  earned,  unless  the  same  should  be  en- 
tered on  the  ledger  as  income  during  the  year  in  which  they 
were  received.82 

§  106.     Rules  as  to  Foreign  Corporations 

As  foreign  corporations  are  taxed  only  upon  so  much  of 
their  income  as  they  receive  from  business  transacted  or 
capital  invested  in  the  United  States,  under  the  federal  stat- 
ute, so  their  allowable  deductions  are  correspondingly  restrict- 
ed. Thus,  the  item  of  "expenses"  will  cover  only  expenditures 
in  the  maintenance  and  operation  of  the  business  and  proper- 
ty within  the  United  States.  So  "losses"  must  be  "actually 
sustained  within  the  year  in  business  conducted  by  it  within 
the  United  States."  And  as  to  deducting  interest  paid  by  a 
foreign  company,  the  rule  prescribed  is  that  it  may  claim  a 
deduction  for  interest  on  its  indebtedness,  to  an  amount  of 
such  indebtedness  not  exceeding  that  portion  of  its  paid-up 
capital  stock  (plus  one  half  the  sum  of  its  bonded  debt)  which 
may  be  regarded  as  invested  or  employed  in  this  country, 
which  is  to  be  ascertained  by  taking  the  ratio  between  "the 

»i  Sun  Insurance  Office  v.   Clark   [1912]   App.  Cas.  443. 
»2  Treasury  Decisions,  No.  1742,  par.  70. 

(216) 


Ch.  8)  DEDUCTIONS   AND   ALLOWANCES  §  106 

gross  amount  of  its  income  for  the  year  from  business  trans- 
acted and  capital  invested  within  the  United  States"  and  "the 
gross  amount  of  its  income  derived  from  all  sources  within 
and  without  the  United  States."  As  to  taxes,  a  foreign  com- 
pany is  allowed  to  deduct  only  "sums  paid  by  it  within  the 
year  for  taxes  imposed  under  the  authority  of  the  United 
States  or  of  any  state  or  territory  thereof  or  the  District  of 
Columbia." 

(217) 


§  107  INCOME   TAXATION  (  Ch.  9 

CHAPTER  IX 

RETURN  OF  INCOME  AND  COLLECTION  OF  TAX 

§  107.  Taxpayers'  Returns,  Who  Required  to  Make. 

108.  Returns  by  Guardians,  Trustees,  and  Other  Fiduciaries. 

109.  Form  and  Contents  of  Return. 

110.  Including  Income  of  Wife  and  Children. 

111.  Time  for  Filing  Returns. 

112.  Where  Returns  are  to  be  Filed. 

113.  Publicity  or  Inspection  of  Returns. 

114.  Penalties  for  Divulging  Information. 

115.  Proceedings  in  Case  of  Refusal  or  Neglect  to  File  Return. 

116.  Same;    Examination  of  Books,  Papers,  and  Witnesses. 

117.  Assessment  of  the  Tax. 

118.  Appeal  and  Review  of  Assessment 

119.  Rate  of  Tax. 

120.  When  Tax  is  Payable. 

121.  Penalties  for  Delinquency  and  False  Returns. 

122.  Lien  of  Tax. 

123.  Process  for  Recovery  of  Tax. 

124.  Compromise  of  Litigation. 

125.  Collection  at  the  Source. 

§  107.     Taxpayers'  Returns,  Who  Required  to  Make 

The  act  of  Congress  of  1913  requires  a  return  to  be  made 
by  "each  person  of  lawful  age,  except  as  hereinafter  provided, 
subject  to  the  tax  imposed  by  this  section,  and  having  a  net 
income  of  $3,000  or  over  for  the  taxable  year."  This  includes 
married  women  having  an  independent  income  of  the  required 
amount,  but  not  minors,  the  returns  for  the  latter  being  made 
by  their  guardians  or  trustees.  It  might  be  a  debatable  ques- 
tion whether  the  phrase  "net  income"  as  here  used,  means 
the  income  of  the  person  before  or  after  subtracting  the  items 
specially  allowed  to  be  deducted,  such  as  business  expenses, 
interest  and  taxes  paid,  losses  incurred,  bad  debts,  depreciation 
of  property,  and  dividends  from  corporations.  But  the  leg- 
islative history  of  the  act  shows  that  "net  income"  is  intended. 

(218) 


Ch.  9)       RETURN   OF   INCOME   AND    COLLECTION  OF   TAX       §  107 

For  the  measure  as  originally  passed  by  the  House  of  Repre- 
sentatives required  returns  to  be  made  by  persons  "having  a 
net  income"  of  the  designated  amount,  and  this  was  changed 
by  the  Senate  so  as  to  read  "having  an  income,"  etc.  But 
this  amendment  was  rejected  by  the  conference  committee; 
hence,  the  omission  of  the  word  "net"  must  be  regarded  as 
significant.  This  part  of  the  law  applies  to  persons  residing 
abroad,  as  well  as  to  residents  of  the  United  States.  As  to 
corporations,  the  requirement  is  that  a  return  shall  be  made 
by  "all  corporations,  joint  stock  companies  or  associations,  and 
insurance  companies  subject  to  the  tax  herein  imposed,"  in- 
cluding foreign  corporations  doing  business  in  the  United 
States. 

The  Wisconsin  statute  requires  a  return  from  "every  corpo- 
ration, joint  stock  company  or  association,  whether  taxable 
under  this  act  or  not."  As  to  individuals,  the  provision  is 
that  the  assessor  of  incomes  is  to  ascertain  what  persons  in 
his  district  are  subject  to  the  tax,  and  any  person  who,  in  his 
judgment,  is  so  subject  shall  be  required  by  him  to  make  a 
report.  The  state  tax  commission  rules  that  the  fact  that  the 
individual  is  not  subject  to  the  income  tax  will  not  relieve 
him  from  the  duty  of  making  a  return  when  so  demanded; 
and  also  that  a  person  who  is  in  fact  subject  to  the  tax  is 
not  relieved  from  the  obligation  to  make  a  return  by  the  fact 
that  he  has  not  been  formally  required  to  do  so  by  the  assessor, 
and  there  is  a  penalty  prescribed  for  failure  or  refusal  to 
make  the  return. 

In  South  Carolina,  the  law  provides  that  "all  persons  lia- 
ble for  the  payment  of  any  of  the  tax  herein  provided  for," 
including  non-residents,  shall  make  a  return.  In  North  Caro- 
lina, the  blank  furnished  to  taxpayers  for  listing  their  real  and 
personal  property  shall  contain  the  following  question :  "Was 
your  gross  income  from  salaries,  fees,  trade,  profession  and 
property  not  taxed,  any  or  all  of  them,  for  the  year  ending 
June  first,  in  excess  of  one  thousand  dollars?"  And  if  the 

(219) 


§107  INCOME   TAXATION  (Ch.  9 

taxpayer  answers  this  question  in  the  affirmative,  he  is  to 
be  furnished  with  another  blank  on  which  to  make  his  return 
of  income  for  taxation.  Provision  is  also  made  for  reporting 
the  names  of  persons  who  have  not  made  this  return  but  are 
believed  to  be  liable  for  the  income  tax,  and  for  requiring  such 
persons  to  make  the  return.  In  Oklahoma,  the  provision  is 
practically  the  same  as  in  North  Carolina,  except  that  the 
question  relates  to  income  in  excess  of  $3,500.  In  Hawaii, 
the  statute  provides  that  "it  shall  be  the  duty  of  all  persons 
of  lawful  age  having  an  income  of  six  hundred  dollars  or 
more  for  the  preceding  year,  from  all  sources,  and  of  all  cor- 
porations made  liable  to  income  tax,  to  make  and  render  a 
list  or  return."  All  the  statutes  above  referred  to  may  be 
seen  in  full  in  the  appendix  to  this  volume. 

The  English  cases  hold  that  a  corporation  which  is  spe- 
cifically exempted  from  the  operation  of  the  income  tax  law 
is  not  required  to  make  any  return.1  But  a  contrary  ruling 
was  made  by  the  internal  revenue  department  in  construing 
the  act  of  Congress  of  1909,  for  it  was  held  that  corporations 
claiming  a  special  exemption  must  nevertheless  make  a  return 
(which  might  be  in  blank,  if  desired)  accompanied  by  a  state- 
ment setting  forth  the  ground  on  which  the  exemption  was 
claimed.2  It  was  also  held  by  the  courts  that  all  corporations 
must  make  the  required  return,  whether  or  not  they  had  a 
sufficient  income  to  be  taxable,  and  if  they  omitted  to  do  so, 
they  were  liable  to  the  penalty  imposed  by  the  statute,  though 
the  only  reas6n  was  the  belief  that  no  return  was  necessary 
where  there  was  no  taxable  income.3  But  these  decisions  were 
based  on  the  ground  that  the  existence  of  a  taxable  income, 


1  Commissioners   of   Inland   Revenue  v.   Incorporated   Council   of 
Law  Reporting,  22  Q.  B.  Div.  291,  3  Tax  Gas.  105. 

2  Treasury  Decisions,  No.  1742,  par.  3. 

*  United  States  v.  Acorn  Roofing  Co.,  204  Fed.  157;  United  States 
v.  Military  Construction  Co.,  204  Fed.  153.  See  also  29  Opin.  Atty. 
Gen.  p.  217. 

(220) 


Gh.  9)       RETURN   OF    INCOME    AND    COLLECTION  OF   TAX       §  108 

above  the  statutory  exemption,  might  often  be  a  matter  of 
close  calculation,  and  might  depend  on  the  allowance  or  re- 
jection of  many  claims  for  deductions,  under  the  headings  of 
expenses,  interest  paid,  depreciation  of  property,  and  the  like. 
And  it  would  obviously  be  improper  to  allow  a  corporation  to 
decide  for  itself  whether  or  not  it  was  liable  to  the  tax  and 
to  make  or  withhold  a  return  accordingly.  But  these  con- 
siderations do  not  apply  in  the  case  of  a  corporation  which  is 
expressly  and  entirely  exempted  from  the  payment  of  the  tax. 
And  no  language  could  be  chosen  more  broad  and  sweeping 
than  the  words  employed  in  the  act  of  Congress  of  1913  in 
regard  to  exempt  corporations,  viz.,  "nothing  in  this  section 
shall  apply  to"  the  companies  thereafter  specifically  described. 
Since  the  whole  of  the  income  tax  law  is  contained  within  one 
section  of  the  tariff  act  in  which  it  is  found,  it  is  evident  that 
the  word  "section"  in  the  phrase  quoted  cannot  be  restricted 
to  the  subdivision  or  paragraph  in  which  the  phrase  occurs, 
but  means  the  entire  act  in  so  far  as  it  relates  to  income  taxa- 
tion. Hence  if  given  classes  of  corporations  are  expressly 
exempted  from  the  incidence  of  the  tax,  they  are  also  ex- 
pressly exempted  from  the  duty  of  making  a  return. 

§  108.     Returns  by  Guardians,  Trustees,  and  Other  Fidu- 
ciaries 

The  act  of  Congress  of  1913  provides  that  "guardians,  trus- 
tees, executors,  administrators,  agents,  receivers,  conservators, 
and  all  persons,  corporations,  or  associations  acting  in  any 
fiduciary  capacity,  shall  make  and  render  a  return  of  the  net 
income  of  the  person  for  whom  they  act,  subject  to  this  tax, 
coming  into  their  custody  or  control  and  management."  The 
use  of  the  word  "agents"  in  this  sentence  is  ambiguous,  but 
its  scope  should  be  limited  by  the  terms  with  which  it  is  as- 
sociated, and  so  should  be  understood  as  meaning  agents  who 
are  charged  with  the  collection  of  the  whole  or  the  chief  part 
of  another  person's  income,  as  guardians,  receivers,  and  con- 

(221) 


§  108  INCOME   TAXATION  (Ch.  9 

servators  of  lunatics  are.  The  act  also  provides  that  all  per- 
sons, firms,  and  corporations,  "in  whatever  capacity  acting," 
that  is,  whether  acting  in  a  fiduciary  capacity  or  not,  "having 
the  control,  receipt,  disposal  or  payment  of  fixed  or  deter- 
minable  annual  or  periodical  gains,  profits,  and  income  of 
another  person  subject  to  tax,"  and  who  are  required  to 
withhold  the  tax  from  such  income  and  pay  it  over  to  the 
government,  "shall  in  behalf  of  such  person  make  and  ren- 
der a  return,  as  aforesaid,  but  separate  and  distinct,  of  the 
portion  of  the  income  of  each  person  from  which  the  normal 
tax  has  been  thus  withheld."  But  in  neither  of  these  two 
cases  is  a  return  required  where  the  income  concerned  does 
not  exceed  $3,000.  There  is  also  a  provision  that  "any  per- 
son for  whom  return  has  been  made  and  the  tax  paid,  or  to 
be  paid  as  aforesaid,  shall  not  be  required  to  make  a  return 
unless  such  person  has  other  net  income."  As  regards  guard- 
ians, trustees,  etc.,  almost  identical  terms  are  found  in  the 
statutes  of  the  various  states,  requiring  them  to  make  returns 
for  their  wards  or  beneficiaries. 

The  federal  statute  also  provides  that  "a  return  made  by 
one  of  two  or  more  joint  guardians,  trustees,  executors,  ad- 
ministrators, agents,  receivers,  and  conservators,  or  other  per- 
sons acting  in  a  fiduciary  capacity,  filed  in  the  district  where 
such  person  resides,  or  in  the  district  where  the  will  or  other 
instrument  under  which  he  acts  is  recorded,  under  such  reg- 
ulations as  the  Secretary  of  the  Treasury  may  prescribe,  shall 
be  a  sufficient  compliance  with  the  requirements  of  this  par- 
agraph." It  is  also  to  be  noted  that  the  act  lays  the  duty  of 
making  a  return,  and  also  of  withholding  the  income  tax,  upon 
"lessees"  with  respect  to  rent  payable  by  them  in  excess  of 
$3,000  for  any  taxable  year. 

§  109.     Form  and  Contents  of  Return 

The  federal  income  tax  law  provides  that  returns,  both  of 
individuals  and  corporations,  shall  be  "in  such  form  as  the 

(222) 


Ch.  9)       RETURN    OF   INCOME   AND    COLLECTION  OF   TAX       §  109 

Commissioner  of  Internal  Revenue,  with  the  approval  of 
the  Secretary  of  the  Treasury,  shall  prescribe."  4  But  in 
the  case  of  the  return  of  an  individual  taxpayer,  the  stat- 
ute requires  that  it  shall  set  forth  specifically  the  gross 
amount  of  income  from  all  separate  sources,  and  that,  from 
the  total  thereof,  there  shall  be  deducted  the  "aggregate 
items  or  expenses  and  allowance  herein  authorized."  In  the 
case  of  corporations,  the  directions  as  to  what  shall  appear 
on  the  face  of  the  return  are  elaborate  and  detailed,  and 
will  not  be  repeated  here,  since  they  seem  to  call  for  no 
special  comment,  but  may  be  seen  at  large  in  the  appendix 
to  this  volume.  It  is  also  the  policy  of  the  state  income  tax 
laws  to  leave  to  the  proper  state  officer  or  commission  the 
settlement  of  the  details  and  form  of  the  taxpayer's  return, 
except  in  North  Carolina  and  Oklahoma,  where  the  form 
of  the  return  is  prescribed  in  the  statute  and  consists  of  a 
mere  statement  (under  oath)  that  the  person's  income 
from  the  sources  mentioned,  during  the  fiscal  year,  over 
and  above  the  statutory  exemption,  amounted  to  such  and 
such  a  sum.  All  the  statutes  require  the  return  to  be  veri- 
fied by  the  oath  or  affirmation  of  the  person  making  it. 
But  the  penalties  for  intentional  falsehood  in  the  state- 
ments of  the  return  vary  greatly  in  the  different  jurisdic- 
tions.5 But  it  is  believed  that  the  penalties  of  perjury  as 
at  common  law  would  attach  to  such  false  swearing,  unless 
the  statute  expressly  declares  the  offense  to  be  a  misde- 
meanor or  expressly  prescribes  a  punishment  in  the  nature 
of  a  fine.  For  it  has  been  decided  that  although  an  act  im- 
posing a  tax  on  incomes  makes  no  provision  for  compel- 
ling a  person  to  make  oath  to  his  return,  yet  if  it  permits 

*  Regulations  made  by  the  Commissioner  pursuant  to  statutory  au- 
thority, with  the  approval  of  the  Secretary  of  the  Treasury,  in  re- 
spect to  the  assessment  and  collection  of  internal  revenue  taxes,  have 
the  force  of  statutes ;  and  the  acts  of  the  Commissioner  are  presum- 
ed to  be  the  acts  of  the  Secretary.  In  re  Huttman,  70  Fed.  699. 

B  See,  infra,  §  121. 

(223) 


§  110  INCOME   TAXATION  (Ch.  9 

him  to  do  so,  and  he  avails  himself  of  the  privilege,  and 
makes  a  false  return,  he  is  guilty  of  perjury.6 

§  110.     Including  Income  of  Wife  and  Children 

The  Wisconsin  statute  provides  that,  in  computing  the 
exemptions  allowed  and  the  amount  of  the  tax  payable, 
"the  income  of  a  wife  shall  be  added  to  the  income  of  her 
husband,  and  the  income  of  each  child  under  eighteen  years 
of  age  to  that  of  its  parent  or  parents,  when  said  wife  or 
child  is  not  living  separately  from  said  husband,  parent,  or 
parents."  In  Virginia  the  corresponding  provision  is  that 
"only  one  deduction  of  one  thousand  dollars  shall  be  made 
from  the  aggregate  income  of  any  family."  In  Hawaii,  the 
act  provides  that  "only  one  deduction  of  one  thousand  dol- 
lars shall  be  made  from  the  aggregate  annual  income  of  all 
the  members  of  one  family  composed  of  one  or  both  parents 
and  one  or  more  minor  children,  or  husband  and  wife." 
With  the  exception  of  Wisconsin,  none  of  these  statutes  ex- 
pressly requires  a  taxpayer  who  is  a  husband  and  head  of 
a  family  to  include  in  his  own  return  the  separate  income  of 
his  wife  and  children.  Yet  such  is  their  apparent  intention. 
And  it  is  difficult  to  see  in  what  other  way  the  provision 
could  be  made  effective.  It  may  be  added  that  the  consti- 
tutional validity  of  provisions  of  this  kind  has  been  sustain- 
ed by  the  courts.7 

On  the  other  hand,  the  act  of  Congress  of  1913  treats 
husband  and  wife  as  separate  and  distinct  taxpayers,  each 
of  whom,  without  reference  to  the  other,  is  required  to 
make  a  return  and  pay  the  tax  if  he  or  she  has  a  sufficient 
income.  And  the  language  of  the  statute  shows  that  it 
was  within  the  contemplation  of  Congress  that  both  a  hus- 
band and  wife  might  be  separately  taxable,  or  that  either, 
without  the  other,  might  be  taxable.  But  as  to  the  matter 

«  United  States  v.  Smith,  1  Sawy.  277,  Fed.  Gas.  No.  16,341. 
i  Robertson  v.  Pratt,  13  Hawaii,  590. 

(224) 


Ch.  9)       RETURN   OP    INCOME   AND    COLLECTION  OP   TAX       §  111 

of  exemptions,  a  married  pair  living  together  may  claim  an 
exemption  greater  by  $1,000  that  that  allowed  to  an  un- 
married person,  presumably  on  account  of  the  greater  ex- 
penses of  family  life.  This  additional  exemption,  however, 
cannot  be  claimed  by  both  the  husband  and  the  wife.  It 
may  be  claimed  by  a  married  man,  living  with  and  support- 
ing his  wife,  provided  that  she  herself  has  not  a  taxable  in- 
come. Or  it  may  be  claimed  by  a  married  woman,  with  a 
husband  living  with  her,  where  she  has  a  taxable  income 
and  he  has  not.  But  if  both  have  taxable  incomes,  apparent- 
ly one  only  can  claim  the  additional  exemption.  So  far  the 
statute  is  reasonably  intelligible.  But  its  meaning  is  much 
clouded  by  the  addition  of  the  provision  that  "only  one  de- 
duction of  $4,000  shall  be  made  from  the  aggregate  in- 
come of  both  husband  and  wife  when  living  together."  Ap- 
parently the  intention  is  that  if  either  of  the  spouses 
(whether  the  husband  or  the  wife)  has  an  income  large 
enough  to  be  taxable,  while  the  other  has  a  separate  and 
independent  income  not  large  enough  to  be  taxable,  both 
incomes  shall  be  added  together  and  included  in  the  return 
to  be  made  by  the  taxable  person,  and  thereupon  a  total 
deduction  of  $4,000  may  be  made  from  the  aggregate 
amount  of  income  so  included. 

§  111.     Time  for  Filing  Returns 

The  time  for  filing  an  income-tax  return,  under  the  fed- 
eral statute,  is  the  first  day  of  March  in  each  year,  the  re- 
turn relating  to  the  income  of  the  preceding  calendar  year, 
that  is,  the  year  ending  on  the  thirty-first  of  December 
preceding.  This  applies  alike  to  individuals  and  corpora- 
tions, except  that  the  latter  are  permitted  to  designate  a 
fiscal  year  of  their  own,  which  may  not  be  coterminous 
with  the  calendar  year,  and  be  taxed  upon  the  income  of 
such  fiscal  year,  and  in  this  case  the  return  is  to  be  made 
within  sixty  days  after  the  close  of  such  fiscal  year.  It  is 
BL.INC.TAX.— 15  (225) 


§  112  INCOME   TAXATION  (Ch.  9 

also  provided  that  when  the  neglect  of  any  taxpayer  (in- 
dividual or  corporate)  to  file  the  return  at  the  time  pre- 
scribed is  due  to  "sickness  or  absence,"  the  collector  of  in- 
ternal revenue  "may  allow  such  further  time  for  making 
and  delivering  such  list  or  return  as  he  may  deem  neces- 
sary, not  exceeding  thirty  days."  The  Wisconsin  income 
tax  law  contains  similar  provisions  as  to  allowing  corpo- 
rations to  base  their  returns  on  the  business  of  their  own 
fiscal  year,  and  as  to  an  extension  of  time  in  case  of  the 
"sickness  or  absence  of  an  officer  of  any  corporation,  joint 
stock  company  or  association  required  to  make  said  return, 
or  for  other  sufficient  reason."  But  the  time  for  filing  re- 
turns is  not  prescribed  by  the  statute,  but  is  left  to  the  de- 
termination of  the  state  tax  commission,  which  has  appar- 
ently designated  the  first  of  March  in  each  year.8  It  was 
ruled  by  the  treasury  department,  under  the  act  of  1909, 
that  where  a  corporation  makes  its  return  in  due  time,  but 
it  is  returned  for  corrections,  and  a  correct  return  is  after- 
wards filed,  though  after  the  appointed  day,  the  corporation 
is  not  to  be  regarded  as  delinquent,  and  the  penalty  for 
neglecting  or  refusing  to  make  a  return  will  not  attach.9 

§  112.     Where  Returns  are  to  be  Filed 

The  federal  statute  requires  the  return  of  an  individual 
taxpayer  to  be  filed  with  the  collector  of  internal  revenue 
"for  the  district  in  which  such  person  resides  or  has  his 
principal  place  of  business,  or,  in  the  case  of  a  person  re- 
siding in  a  foreign  country,  in  the  place  where  his  principal 
business  is  carried  on  within  the  United  States."  In  the 
case  of  a  domestic  corporation,  the  return  is  to  be  filed 
with  the  collector  "for  the  district  in  which  it  has  its  prin- 
cipal place  of  business,"  and  in  the  case  of  a  foreign  corpo- 

«  Wisconsin  Income  Tax  Law,  edition  published  by  State  Tax  Com- 
mission, 1911,  p.  32. 

»  Treasury  Decisions,  No.  1711. 

(226) 


Ch.  9)       RETURN    OF   INCOME   AND    COLLECTION  OF   TAX       §  112 

ration,  "in  the  place  where  its  principal  business  is  located 
within  the  United  States."  Under  similar  provisions  in  the 
corporation  tax  law  of  1909,  it  was  ruled  that  returns  filed 
with  a  deputy  collector  of  internal  revenue  are  regarded  as 
having  been  filed  with  the  collector;10  that  the  "principal 
place  of  business"  means  the  principal  office  where  a  cor- 
poration keeps  its  books  from  which  the  required  return  is 
to  be  prepared,  and  not  necessarily  the  place  where  the 
operating  plant  is  located;11  and  that  foreign  corporations 
having  several  branch  offices  in  the  United  States  should 
each  designate  one  of  such  branches  as  its  principal  office, 
and  should  also  designate  the  proper  officers  to  make  the 
required  return.12  Under  the  law  in  Wisconsin  an  impor- 
tant distinction  is  made  between  the  returns  of  corporations 
and  those  of  individuals.  The  former  are  to  be  filed  with 
the  state  tax  commission,  the  latter  with  the  assessor  of 
incomes  of  the  district.  In  the  case  of  a  guardian,  trustee, 
executor,  etc.,  the  district  is  that  in  which  he  resides,  rath- 
er than  that  in  which  the  ward  or  beneficiary  may  reside. 
In  the  case  of  a  non-resident,  the  income  is  to  be  "assessed 
and  taxed  in  the  town,  city,  or  village  from  which  such  in- 
come is  derived,"  where  apparently  also  the  return  should 
be  filed.  In  South  Carolina,  the  return  is  to  be  rendered  to 
the  auditor  of  the  county  in  which  the  taxpayer  resides, 
whether  he  makes  the  return  for  himself  or  in  the  capacity 
of  a  guardian,  trustee,  or  other  fiduciary.  But  in  the  case 
of  a  non-resident,  the  return  is  to  be  filed  with  the  auditor 
or  auditors  of  the  county  or  counties  where  his  taxable  in- 
come arises.  In  Oklahoma,  the  return  is  to  be  made  to  the 
local  assessor  of  taxes,  and  forwarded  by  him  to  the  state 
auditor;  and  in  North  Carolina,  it  is  to  be  rendered  to  the 

10  Treasury  Decisions,  No.  1742,  par.  40. 

11  Treasury  Decisions,  No.  1742,  par.  13. 

12  Treasury  Decisions,  No.  1742,  par.  11. 

(227) 


§  113  INCOME    TAXATION  (Ch.  9 

list-taker,  and  forwarded  to  the  state  corporation  commis- 
sion. 

§  113.     Publicity  or  Inspection  of  Returns 

The  act  of  Congress  of  1913,  in  so  far  as  relates  to  corpora- 
tions, provides  that,  when  the  assessment  shall  have  been  made, 
the  returns  shall  be  filed  in  the  office  of  the  Commissioner  of 
Internal  Revenue,  "and  shall  constitute  public  records  and  be 
open  to  inspection  as  such :  Provided,  that  any  and  all  such  re- 
turns shall  be  open  to  inspection  only  upon  the  order  of  the 
President,  under  rules  and  regulations  to  be  prescribed  by  the 
Secretary  of  the  Treasury  and  approved  by  the  President." 
It  also  contains  a  provision  apparently  intended  to  aid  in  the 
administration  of  the  revenue  laws  of  such  states  as  may  lay  a 
tax  on  incomes,  concurrently  with  the  federal  statute,  by 
throwing  open  to  their  officers,  under  proper  restrictions,  the 
facts  in  the  possession  of  the  federal  officers  concerning  tax- 
able corporations.  This  provision  is  as  follows :  "That  the 
proper  officers  of  any  state  imposing  a  general  income  tax 
may,  upon  the  request  of  the  governor  thereof,  have  access  to 
said  returns  or  to  an  abstract  thereof,  showing  the  name  and 
income  of  each  such  corporation,  joint  stock  company,  associa- 
tion, or  insurance  company,  at  such  times  and  in  such  manner 
as  the  Secretary  of  the  Treasury  may  prescribe."  The  substan- 
tive part  of  this  enactment  was  taken  from  the  corporation  tax 
law  of  1909,  and  the  proviso  from  an  amendatory  act  of  1910. 
In  pursuance  thereof,  regulations  were  prescribed  by  the  Sec- 
retary of  the  Treasury  November  25,  1910,  and  approved  by 
the  President,  and  the  latter  issued  an  executive  order  of  the 
same  date  putting  them  in  force.  These  regulations  may  be 
epitomized  as  follows:  The  returns  of  all  corporations  shall 
be  open  to  the  inspection  of  the  proper  officers  and  employes 
of  the  Treasury  Department,  and  of  the  officers  and  employes 
of  other  departments  of  the  government,  but  in  the  latter  case 
only  on  a  written  application,  signed  by  the  head  of  the  depart- 

(228) 


Ch.  9)       RETURN    OF   INCOME   AND    COLLECTION  OF   TAX       §  113 

ment,  setting  forth  the  reasons  for  making  it,  and  addressed  to 
the  Secretary  of  the  Treasury.  But  if  inspection  of  the  return 
of  any  corporation  is  desired  for  the  purpose  of  using  the  re- 
turn (or  information  derived  from  it)  in  any  legal  proceeding, 
or  if  inspection  is  desired  by  any  official  of  any  state  or  ter- 
ritory, then  the  application  must  first  be  referred  to  the  At- 
torney General,  and,  if  recommended  by  him,  transmitted  to 
the  Secretary  of  the  Treasury.  Any  bona  fide  stockholder 
may  be  permitted  to  inspect  the  return  made  by  his  own  cor- 
poration, on  satisfactory  proof  of  his  ownership  of  stock  in  it, 
and  on  application  to  the  Secretary  of  the  Treasury  showing 
good  and  sufficient  cause.  But  the  granting  of  such  an  appli- 
cation is  in  the  discretion  of  the  Secretary,  and  permission 
granted  cannot  be  delegated  or  transferred  to  another  person. 
The  returns  of  certain  corporations  may  be  inspected  by  any 
person,  on  written  application  to  the  Secretary  of  the  Treas- 
ury, setting  forth  briefly  and  succinctly  the  facts  necessary  to 
enable  him  to  act  upon  the  request.  These  are  (a)  companies 
whose  stock  is  listed  upon  any  duly  organized  and  recognized 
stock  exchange  within  the  United  States;  (b)  corporations 
whose  stock  is  advertised  in  the  press  or  offered  to  the  public 
by  the  corporation  itself  for  sale.13  It  will  be  observed  that 
there  is  no  similar  provision  in  the  statute  concerning  the  re- 
turns made  by  individual  taxpayers,  and  these  apparently  are 
not  public  records  nor  open  to  inspection  by  any  one  or  on  any 
conditions. 

In  the  Wisconsin  statute  it  is  provided  that  "nothing  herein 
shall  be  construed  as  preventing  the  assessment  roll,  the  tax 
roll,  and  all  proceedings  had  before  the  county  board  of  review 
and  all  evidence  taken  at  such  hearing  from  being  open  to  pub- 
lic inspection  at  such  times  and  under  such  conditions  as  the 
state  tax  commission  may  direct."  This,  as  construed  by  the 


13  These  regulations  may  be  seen  in  full  in  Treasury  Decisions, 
No.  1665. 

(229) 


§  113  INCOME    TAXATION  (Ch.  9 

revenue  officers  of  the  state,  authorizes  inspection  by  the  public 
of  the  roll  or  list  of  persons  subject  to  the  income  tax  and  the 
amount  of  their  taxable  income,  as  prepared  by  the  assessors 
of  income,  and  also  the  proceedings  before  the  board  of  review 
to  such  an  extent  as  the  tax  commission  may  authorize. 

To  the  limited  extent  to  which  statutes  of  this  character  au- 
thorize the  publication  or  inspection  of  taxpayers'  returns,  it 
is  held  that  they  do  not  violate  the  constitutional  prohibitions 
against  unreasonable  searches  and  seizures.14  But  aside  from 
statutory  authorization,  the  courts  have  shown  great  reluctance 
to  force  the  disclosure  of  matters  contained  in  such  essentially 
confidential  documents,  even  when  desired  in  the  interests  of 
public  justice.  Thus,  in  England,  it  is  held  that  a  court  will 
not  compel  the  tax  officers  to  produce  or  exhibit  documents  in 
their  possession  (such  as  a  taxpayer's  return)  for  use  in  litiga- 
tion or  for  the  use  of  a  receiver,  when  it  is  stated  that  such  a 
course  would  be  prejudicial  and  injurious  to  the  public  service 
and  interests.15  And  in  the  United  States  the  rule  is  even 
more  strict.  For  a  collector  of  internal  revenue  cannot  be 
compelled  to  testify,  even  in  a  criminal  proceeding  in  a  state 
court,  concerning  statements  made  to  him  by  an  applicant  for 
a  liquor  dealer's  tax-stamp,  which  statements  were  made  for 
the  purpose  of  being  reduced  to  writing  and  embodied  in  the 
records  of  the  internal  revenue  office;  for,  to  divulge  such 
statements,  would* be  to  divulge  the  contents  of  the  records 
themselves,  and  this  is  forbidden  by  the  internal  revenue  regu- 
lations.16 

§  114.     Penalties  for  Divulging  Information 

To  encourage  frank  and  full  disclosures  by  taxpayers,  and 
to  remove  as  far  as  possible  the  inquisitorial  features  of  such 

i*  Flint  v.  Stone  Tracy  Co.,  220  TJ.  S.  107,  31  Sup.  Ct.  342,  55  L. 
Ed.  389. 

is  In  re  Joseph  Hargreaves,  Ltd.  [1900]  1  Ch.  347,  4  Tax  Cas.  173. 
ie  In  re  Huttman,  70  Fed.  699. 

(230) 


Ch.  9)       RETURN    OF   INCOME   AND    COLLECTION  OF   TAX       §  114: 

a  law,  the  income  tax  statutes  denounce  very  heavy  penalties 
upon  the  officers  charged  with  the  assessment  and  collection  of 
the  tax  if  they  shall  divulge  or  make  known  (except  to  the 
limited  extent  authorized  by  the  statute)  the  return  of  any 
taxpayer  or  its  items  or  details.  The  act  of  Congress  also 
forbids  these  officers  to  permit  any  person  to  see  or  examine 
any  return  or  any  copy  thereof  or  any  book  containing  any  ab- 
stract or  particulars  thereof ;  and  also  provides  that  it  shall  be 
unlawful  for  any  person  to  print  or  publish  in  any  manner 
whatever  not  provided  by  law,  any  income  return  or  any  part 
thereof,  or  the  amount  or  source  of  income,  profits,  losses,  or 
expenditures  appearing  in  any  income  return.  Any  violation 
of  these  provisions  is  declared  a  misdemeanor,  and  the  punish- 
ment prescribed  is  a  fine  not  exceeding  $1,000,  or  imprison- 
ment not  exceeding  one  year,  or  both,  and  in  addition,  if  the 
offender  is  an  officer  or  employe  of  the  United  States,  dis- 
missal from  office  and  perpetual  incapacity  for  holding  any 
office  under  the  government.17  In  Wisconsin,  the  prohibition 
is  substantially  the  same,  except  that  the  penalty,  though  of 
the  same  character,  is  not  so  severe,  and  except  that  it  applies 
only  to  the  officers  and  employes  of  the  state  or  the  assessment 
districts,  so  that,  if  they  violate  their  duty  and  disclose  the  con- 
tents of  returns,  there  is  apparently  nothing  to  forbid  any  per- 
son from  printing  and  publishing  such  information.18  In  Okla- 
homa, on  the  other  hand,  the  provision  is  that  "it  shall  be  un- 
lawful for  any  person  to  print  or  publish  in  any  manner  what- 
ever any  income  tax  return,  or  any  part  thereof,  or  the  taxes 
due  thereon,  unless  the  tax  herein  becomes  delinquent,  and  any 
person  violating  the  provisions  of  this  section  shall  be  deemed 
guilty  of  a  misdemeanor  and  shall  be  fined  not  to  exceed  fifty 
dollars  and  imprisoned  in  the  county  jail  not  more  than  thirty 


17  Rev.  Stat.  U.  S.,  §  3167  (TJ.  S.  Comp.  St.  1901,  p.  2058),  as  amend- 
ed by  Income  Tax  Act  of  1913. 

is  Wisconsin  Income  Tax  Law  1911,  §  1087m,  subsec.  24,  pars.  1-3. 

(231) 


§  115  INCOME   TAXATION  (Ch.  9 

days  for  each  offense."  19  And  in  North  Carolina,  the  provi- 
sion is  substantially  the  same  as  in  Oklahoma,  except  that  no 
permission  is  given  for  the  publication  of  the  tax  returns  in 
case  of  delinquency.20 

§  115.     Proceedings  in  Case  of  Refusal  or  Neglect  to  File 
Return 

As  a  general  rule,  where  a  taxable  person  or  corporation 
refuses  or  omits  to  make  the  required  return,  or  makes  a  false 
and  fraudulent  return,  it  is  made  the  duty  of  the  assessor  or 
collector  to  make  and  compile  the  return  on  the  best  in- 
formation he  can  obtain.  Thus,  under  the  act  of  Congress, 
the  return  in  such  cases  is  to  be  made  by  the  collector  or 
deputy  collector  of  internal  revenue  on  the  best  information 
which  he  can  obtain,  including  that  elicited  on  his  examina- 
tion of  witnesses  and  of  books  and  papers,  and  "on  his  own 
view  and  information."  In  Wisconsin,  while  penalties  are 
prescribed  for  the  neglect  or  refusal  to  make  a  return,  there 
is  no  provision  for  the  making  of  the  return  by  the  taxing  offi- 
cers, except  that,  if  it  is  discovered  that  any  taxable  person 
or  corporation  has  failed  to  make  a  return  in  any  one  of  the 
three  next  previous  years,  the  proper  officer  may  "make  such 
additions  or  corrections  to  the  assessment  as  is  deemed  true 
and  just,  such  correction  to  be  made  in  the  next  tax  levy." 
In  South  Carolina,  any  person  or  corporation  failing  to  make 
the  required  return  "shall  be  assessed  by  the  auditor  on  ac- 
count of  the  income  tax,  in  such  amount  as  appears  to  him 
from  the  best  information  obtainable  by  him  either  by  exam- 
ination of  the  defaulting  taxpayer  or  any  other  evidence,  that 
such  taxpayer  is  liable  for."  In  Hawaii,  the  provision  of  the 
statute  is  that,  in  such  cases,  "the  assessor  may  make  such 
assessments  as  he  may  consider  just,  and  the  same  shall  be 


i»  Oklahoma  Income  Tax  Law,  §  6;   Laws  Oklahoma  1907,  p.  730. 
20  Acts  North  Carolina  1907,  c.  256,  §  23. 

(232) 


Ch.  9)       RETURN    OP   INCOME   AND    COLLECTION  OF   TAX       §  116 

binding  and  conclusive  upon  all  parties,  and  shall  not  be 
subject  to  appeal." 

As  a  general  principle  of  law,  it  is  held,  if  the  taxpayer  re- 
fuses to  give  in  his  income  to  the  assessor,  it  is  the  duty  of 
the  assessor  to  ascertain  its  amount  by  inquiry  or  otherwise, 
to  the  best  of  his  information  and  judgment ;  and  if,  in  dis- 
charging this  duty,  acting  in  good  faith,  the  assessor  fixes 
the  amount  of  such  income  at  a  larger  sum  than  it  in  fact 
amounted  to,  and  assesses  it  at  the  sum  thus  ascertained  by 
him,  such  assessment  is  legal,  notwithstanding  the  mistake 
or  overstatement,  and  the  collection  of  the  tax  so  assessed, 
by  the  tax  collector,  is  also  legal.21  And  in  making  his  es- 
timate of  the  value  of  property  for  the  purpose  of  the  income 
tax  (as,  for  instance,  in  determining  the  rental  value  of  the 
taxpayer's  residence)  the  assessor  is  not  bound  to  accept  and 
follow  the  valuation  placed  on  the  same  property  by  any  other 
assessor  for  the  purposes  of  any  other  tax.22  It  should  also 
be  observed  that  an  assessment  for  the  income  tax  cannot 
be  impeached  collaterally  or  re-examined  in  any  collateral 
proceeding.  It  may  be  subject  to  appeal  or  review,  but  can- 
not be  revised  in  any  other  mode  than  the  special  statutory 
mode  provided  for  that  purpose.  Hence  a  proof  in  bank- 
ruptcy by  a  collector  of  taxes,  in  .respect  of  arrears  due  un- 
der an  assessment  for  the  income  tax,  cannot  be  expunged 
on  the  ground  that  the  debtor  had  not  received  the  income 
or  made  the  profits  so  assessed.23 

§  116.     Same;    Examination  of  Books,  Papers,  and  Wit- 
nesses 

It  is  provided  in  the  Revised  Statutes,  as  amended  by  the 
act  of  Congress  of  1913,  that  if  any  person  shall  refuse  or 
neglect  to  make  the  required  return,  on  notice  and  demand, 

2iLott  v.  Hubbard,  44  Ala.  593. 

22  Walker  v.  Brisley,  4  Tax  Cas.  254. 

as  Calvert  v.  Walker  [1899]  2  Q.  B.  145,  4  Tax  Cas.  79. 


§  116  INCOME*  TAXATION  (Ch.  9 

or  shall  render  a  return  which,  in  the  opinion  of  the  collector, 
is  false  or  fraudulent  or  contains  any  undervaluation  or  un- 
derstatement, "it  shall  be  lawful  for  the  collector  to  summon 
such  person,  or  any  other  person  having  possession,  custody, 
or  care  of  books  of  account  containing  entries  relating  to  the 
business  of  such  person,  or  any  other  person  he  may  deem 
proper,  to  appear  before  him  and  produce  such  books,  at  a 
time  and  place  named  in  the  summons,  and  to  give  testimony 
or  answer  interrogatories,  under  oath,  respecting  any  objects 
liable  to  tax  or  the  returns  thereof.  The  collector  may  sum- 
mon any  person  residing  or  found  within  the  state  in  which 
his  district  lies ;  and  when  the  person  intended  to  be  sum- 
moned does  not  reside  and  cannot  be  found  within  such  state, 
he  may  enter  any  collection  district  where  such  person  may 
be  found  and  there  make  the  examination  herein  authorized. 
And  to  this  end,  he  may  there  exercise  all  the  authority  which 
he  might  lawfully  exercise  in  the  district  for  which  he  was 
commissioned."  And  in  another  part  of  the  statute,  it  is 
provided  that  "jurisdiction  is  hereby  conferred  upon  the  dis- 
trict courts  of  the  United  States  for  the  district  within  which 
any  person  summoned  under  this  section  to  appear  to  testify 
or  to  produce  books  shall  reside,  to  compel  such  attendance, 
production  of  books,  and  testimony  by  appropriate  pro- 
cess." 2*  And  another  federal  statute  provides  that  "every 
collector,  deputy  collector,  and  inspector  is  authorized  to  ad- 
minister oaths  and  to  take  evidence  touching  any  part  of  the 
administration  of  the  internal  revenue  laws  with  which  he  is 
charged,  or  where  such  oaths  and  evidence  are  authorized  by 
law  to  be  taken."  *5 

In  Wisconsin  there  are  stringent  provisions  for  requiring 
the  delinquent  taxpayer  or  corporation  to  furnish  the  in- 
formation necessary  to  make  or  complete  the  return,  but 

2*  Rev.  Stat.  U.  S.,  §  3173  (U.  S.  Comp.  St.  1901,  p.  2065),  and  In- 
come Tax  Act  1913,  subdivisions  "J"  and  "L,"  amending  the  same. 
25  Rev.  Stat  U.  S.,  §  3165  (U.  S.  Comp.  St  1901,  p.  2057). 

(234) 


Ch.  9)       RETURN    OF   INCOME    AND    COLLECTION  OF   TAX       §  116 

none  for  the  examination  of  witnesses  or  of  books  and  papers, 
except  when  an  appeal  is  taken  to  the  board  of  review.  In 
South  Carolina,  the  law  seems  to  authorize  an  "examination 
of  the  defaulting  taxpayer,"  though  it  makes  no  explicit  pro- 
vision for  compelling  his  attendance.  In  Oklahoma  the  state 
auditor  "may  take  such  steps  as  he  may  deem  necessary" 
to  compel  any  delinquent  to  make  a  proper  return  of  his  in- 
come, and  "to  enable  him  to  obtain  such  information,  he  or 
anyone  designated  by  him  to  obtain  such  information  shall 
have  the  power  to  summon  witnesses  within  the  county  in 
which  such  persons  live,"  and  may  invoke  the  aid  of  the 
courts  to  compel  their  attendance.  In  Hawaii,  "it  shall  be 
lawful  for  the  assessor  to  summon  such  person,  or  any  of  the 
officers  of  such  corporation,  or  any  person  having  possession, 
custody,  or  care  of  books  of  account  containing  entries  relat- 
ing to  the  business  of  such  person  or  corporation,  or  any  oth- 
er person  he  may  deem  proper,  wherever  residing  or  found, 
to  appear  before  him  and  produce  such  books  at  a  time  and 
place  named  in  the  summons,  and  to  give  testimony  or  an- 
swer interrogatories  under  oath,  respecting  any  income  liable 
to  tax  or  the  returns  thereof."  2e  But  as  to  the  production  of 
records  or  other  documents  by  public  officers,  the  law  is  not 
very  clear,  and  the  question  has  not  often  arisen.  There  is, 
however,  a  Scotch  decision  in  reference  to  compelling  the 
production  of  documents  for  the  purpose  of  discovering  tax- 
able income,  holding  that  a  public  department  cannot  be  com- 
pelled by  a  court  of  law  to  produce  confidential  documents  in 
its  possession  coming  from  third  parties,  if  so  to  compel  it 
would  be  to  discourage  similar  communications  being  made 
in  the  future.27  In  the  statute  of  Hawaii  we  find  the  following 
severe  and  extraordinary  provision :  "It  shall  be  the  duty  of 

26  Session  Laws  Hawaii  1901,  Act  No.  20,  §  6,  p.  31. 

27  Brown's  Trustees  v.  Hay,  35  Scotch  Law  Rep.  340,  3  Tax  Gas. 
598. 

(235) 


§  117  INCOME    TAXATION  (  Ch.  9 

every  person  or  corporation  doing  business  for  profit  to 
keep  full,  regular,  and  accurate  books  of  accounts  upon  which 
all  its  transactions  shall  be  entered  from  day  to  day  in  regu- 
lar order,  which  books  shall  be  open  to  the  inspection  of  the 
assessor  of  the  division  or  any  person  authorized  by  him  to 
inspect  the  same,  during  business  hours."  It  is  perhaps 
fortunate  that  no  penalty  for  the  violation  of  this  provision 
has  been  prescribed. 

§  117.     Assessment  of  the  Tax 

Under  the  act  of  Congress,  returns  are  to  be  filed  with  the 
collector  or  deputy  collector,  and  it  is  also  the  duty  of  these 
officers,  as  above  stated,  to  require  the  making  of  returns,  or 
to  make  returns  for  delinquent  persons  or  corporations  upon 
information.  But  the  actual  assessment  of  the  tax  is  an  act 
required  to  be  performed  by  the  Commissioner  of  Internal 
Revenue.  And  the  statute  also  gives  to  this  latter  officer  a 
power  and  duty  which  appear  to  overlap  those  intrusted  to  the 
collectors.  For  it  is  provided  that,  "in  cases  of  refusal  or  neg- 
lect to  make  such  return,  and  in  cases  of  false  and  fraudulent 
returns,  the  Commissioner  of  Internal  Revenue  shall,  upon 
discovery  thereof,  at  any  time  within  three  years  after  said 
return  is  due,  make  a  return  upon  information  obtained  as 
provided  for  in  this  section  or  by  existing  law." 

Under  the  Wisconsin  statute,  the  assessment  of  the  income 
tax  upon  corporations,  joint  stock  companies,  and  associations 
is  to  be  made  by  the  state  tax  commission,  but  upon  individual 
taxpayers  by  the  county  assessor  of  incomes.  In  South  Car- 
olina, the  income  tax  "shall  be  assessed,  levied,  and  collected 
in  the  same  manner,  at  the  same  time,  as  other  taxes,  and  by 
the  same  county  officials  as  are  now  charged  with  the  assess- 
ment, levy,  and  collection  of  state  and  county  taxes."  In 
Oklahoma,  the  returns  are  to  be  forwarded  to  the  state  au- 
ditor who  "shall  certify  the  amount  of  the  tax  due  upon  the  in- 

(236) 


Ch.  9)       RETURN    OF    INCOME   AND    COLLECTION  OP   TAX       §  118 

come  so  reported  to  the  county  clerk,"  and  the  latter  shall  ex- 
tend the  same  on  the  tax  rolls  and  deliver  them  to  the  county 
treasurer.  In  North  Carolina,  the  lists  are  to  be  forwarded  to 
the  Corporation  Commission,  which  "shall  certify  the  amount 
of  the  tax  due  upon  the  income  so  reported  to  the  chairman 
of  the  board  of  county  commissioners  of  the  county  in  which 
said  taxpayer  resides,  and  the  same  shall  be  paid  to  the  sher- 
iff of  said  county,  together  with  other  taxes  for  that  year." 

§  118.     Appeal  and  Review  of  Assessment 

The  federal  income  tax  law  provides  that  "if  the  collector 
or  deputy  collector  have  reason  to  believe  that  the  amount  of 
any  income  returned  is  understated,  he  shall  give  due  notice 
to  the  person  making  the  return  to  show  cause  why  the  amount 
of  the  return  should  not  be  increased,  and  upon  proof  of  the 
amount  understated  may  increase  the  same  accordingly."  In 
order  to  understand  the  force  of  this  provision,  it  is  permis- 
sible to  recur  to  the  earlier  acts  of  Congress  on  the  same  sub- 
ject, where  the  idea  was  more  clearly  expressed.  In  the  act 
of  1864,  it  was  provided  that  "if  the  list  or  return  of  any 
party  shall  have  been  increased  by  the  assistant  assessor,  such 
party  may  exhibit  his  books  and  accounts,  and  be  permitted  to 
prove  and  declare,  under  oath  or  affirmation,  the  amount  of 
annual  income  liable  to  be  assessed,  but  such  oaths  and  evi- 
dence shall  not  be  considered  as  conclusive  of  the  facts." 
This  was  repeated  in  the  act  of  1870.  Under  these  earlier 
statutes,  the  assessor  (or  collector)  was  to  increase  a  return 
which,  according  to  his  information  and  judgment,  was  under- 
stated, after  which  the  taxpayer  might  appear  before  him  and 
prove  the  true  amount  of  his  income.  But  under  the  present 
act,  the  increase  is  not  to  be  made  until  after  a  hearing.  The 
collector  is  first  to  give  notice  to  the  taxpayer  and  summon 
him  to  show  cause  why  his  assessment  should  not  be  increased. 
But  probably  the  rule  of  evidence  remains  as  before,  namely, 

(237) 


§118  INCOME    TAXATION  (Ch.  9 

that  the  taxpayer  may  present  his  affidavit  to  the  collector 
stating  the  amount  of  his  assessable  income,  and  exhibit  his 
books  and  accounts  in  support  thereof,  but  neither  the  affi- 
davit nor  the  exhibits  shall  be  so  far  conclusive  as  to  prevent 
the  collector  from  taking  other  evidence,  if  he  is  not  convinced 
of  their  correctness.  Provision  for  an  appeal  to  a  higher  of- 
ficer of  the  revenue  department  is  made,  as  follows :  "If  dis- 
satisfied with  the  decision  of  the  collector,  such  person  may 
submit  the  case,  with  all  the  papers,  to  the  Commissioner  of 
Internal  Revenue  for  his  decision,  and  may  furnish  sworn 
testimony  of  witnesses  to  prove  any  relevant  facts." 

Under  the  law  in  Wisconsin,  the  assessment  of  corporations, 
joint  stock  companies  and  associations  is  made  by  the  state 
tax  commission,  and  it  is  provided  that  any  such  company, 
"feeling  aggrieved  by  the  decision  of  said  commission  regard- 
ing the  assessment  of  its  income,  shall  be  granted  the  same 
rights  of  hearing  and  appeal  as  are  now  granted  corporations 
assessed  by  said  commission."  And  the  commission  explains 
that  the  remedy  here  referred  to  is  found  in  a  statute  which 
provides  that  any  company  claiming  to  be  aggrieved  by  the 
levy  of  a  tax,  and  alleging  facts  showing  substantial  injustice 
in  the  determination  of  the  commission,  may,  within  six 
months  from  the  payment  of  the  tax,  bring  an  action  against 
the  state  in  the  circuit  court  of  Dane  county  to  recover  such 
part  of  the  tax  as  shall  exceed  the  amount  the  company  should 
have  paid.28  But  as  to  the  review  of  assessments  of  income 
tax  upon  individuals,  as  distinguished  from  corporations,  the 
provision  is  entirely  different.  For  this  purpose  a  board  of 
review  is  created  in  each  county,  to  hold  stated  meetings,  of 
which  notice  is  given,  and  having  power  to  enforce  the  attend- 
ance of  witnesses  and  the  exhibition  of  books,  to  hear  com- 


zs  Wisconsin  Income  Tax  Law  1911,  edition  published  by  State 
Tax  Commission,  p.  38,  citing  Laws  Wis.  1903,  c.  315,  §  20,  as  amend- 
ed by  Laws  Wis.  1905,  c.  216,  §  5. 

(238) 


Ch.  9)       RETURN    OF   INCOME   AND    COLLECTION  OF    TAX       §  119 

plaints  preferred  by  persons  aggrieved  or  other  persons,  and 
to  increase  or  lessen  the  amount  of  any  assessment  of  income. 
Any  person  dissatisfied  with  the  decision  of  the  board  of  review 
may  appeal  to  the  state  tax  commission  within  twenty  days. 
But,  as  is  usually  the  case  where  statutes  provide  a  special 
tribunal  for  the  review  of  tax  assessments,  the  taxpayer  must 
exhaust  his  remedy  thus  provided  before  questioning  the 
amount  of  the  assessment  in  any  proceeding  in  a  court  of  jus- 
tice.29 

The  only  other  income  tax  law  making  explicit  provision 
for  a  review  of  the  assessment  is  that  of  Hawaii.  Herein  it 
is  provided  that,  if  any  person  or  corporation  refuses  or  neg- 
lects to  make  the  required  return,  or  refuses  to  verify  it,  the 
assessor  shall  make  such  an  assessment  as  he  deems  just,  and 
there  shall  be  no  appeal  therefrom.  But  any  person  or  cor- 
poration which  has  made  a  legal  return  as  required  may  ap- 
peal, in  respect  to  the  amount  assessed,  to  the  Tax  Appeal 
Court,  having  first  given  the  assessor  written  notice  of  his  in- 
tention to  appeal  and  of  the  grounds  of  appeal,  and  having 
deposited  the  costs  of  appeal.30 

§119.     Rate  of  Tax 

In  two  states  and  one  territory  the  laws  levy  a  "flat"  tax 
on  incomes.  That  is,  the  rate  of  the  tax  remains  the  same 
whatever  be  the  amount  of  the  taxable  income.  In  Virginia, 
the  rate  of  the  tax  is  one  per  cent,  as  it  is  also  in  North  Caro- 
lina. In  Hawaii,  it  is  two  per  cent.  The  act  of  Congress  of 
1913  also  imposes  a  flat  tax  of  one  per  cent  upon  the  income 
of  corporations.  But  as  concerns  individuals,  it  is  graded 
or  progressive,  the  rate  of  taxation  increasing  as  the  amount 
of  taxable  income  increases,  within  or  beyond  certain  fixed 
limits.  This  progressive  feature  is  also  found  in  the  income 

2»  Wisconsin  Income  Tax  Law  1911,  §  1087m,  subds.  14-19. 
so  Session  Laws  Hawaii  1901,  Act  No.  20,  p.  31,  §§  8,  9. 

(239) 


§  119  INCOME   TAXATION  Ch.  9 

tax  laws  of  South  Carolina,  Wisconsin,  and  Oklahoma.  The 
act  of  Congress  (as  to  individuals  only)  first  levies  a  "normal 
income  tax"  of  one  per  cent  on  all  incomes  in  excess  of  the 
statutory  exemption,  and  then  provides  that  there  shall  also 
be  levied  an  "additional  income  tax"  at  the  rate  of  "one  per 
centum  per  annum  upon  the  amount  by  -which  the  total  net 
income  exceeds  $20,000,  and  does  not  exceed  $50,000,  and 
two  per  centum  per  annum  upon  the  amount  by  which  the 
total  net  income  exceeds  $50,000  and  does  not  exceed  $75,000, 
and  three  per  centum  per  annum  upon  the  amount  by  which 
the  total  net  income  exceeds  $75,000  and  does  not  exceed 
$100,000,  and  four  per  centum  per  annum  upon  the  amount  by 
which  the  total  net  income  exceeds  $100,000  and  does  not 
exceed  $250,000,  and  five  per  centum  per  annum  upon  the 
amount  by  which  the  total  net  income  exceeds  $250,000  and 
does  not  exceed  $500,000,  and  six  per  centum  per  annum  upon 
the  amount  by  which  the  total  net  income  exceeds  $500,000." 
In  Wisconsin,  the  rate  for  individuals  is  one  per  cent  upon 
the  first  thousand  dollars  of  taxable  income  or  part  thereof, 
and  from  this  point  the  rate  increases  with  each  successive 
thousand  dollars  of  taxable  income,  advancing  first  by  quar- 
ters of  one  per  cent  and  after  the  fifth  thousand  by  halves 
of  one  per  cent,  to  the  twelfth  thousand,  on  which  the  rate 
is  five  and  one-half  per  cent,  with  a  rate  of  six  per  cent  on 
any  sum  in  excess  of  twelve  thousand  dollars.  As  to  corpo- 
rations, under  the  Wisconsin  statute,  the  rate  is  determined 
by  the  ratio  between  the  taxable  income  of  the  company  and 
the  "assessed  value  of  the  property  used  and  employed  in 
the  acquisition  of  such  income."  If  this  ratio  is  one  per  cent 
or  less,  the  rate  of  the  tax  is  one-half  of  one  per  cent  of 
such  income.  From  this  point  it  advances  "until  the  rate  of 
profits  equals  twelve  per  cent  of  such  assessed  value  of  the 
property  used  and  employed  in  the  acquisition  of  such  in- 
come, when  such  rate  shall  continue  as  a  proportional  rate 

(240) 


Ch.  9)       RETURN   OP    INCOME   AND    COLLECTION  OF   TAX       §  119 

of  six  per  cent  of  such  taxable  income.  In  South  Carolina, 
the  tax  is  at  the  rate  of  one  per  cent  on  incomes  over  and 
above  $2,500  and  up  to  $5,000;  one  and  one-half  per  cent 
on  $5,000  and  over,  up  to  $7,500;  two  per  cent  on  $7,500 
and  over,  up  to  $10,000;  two  and  one-half  per  cent  on  $10,000 
and  over,  up  to  $15,000;  and  three  per  cent  on  $15,000  and 
over.  In  Oklahoma,  the  rate  is  five  mills  on  the  dollar  on 
the  excess  of  income  over  $3,500  and  less  than  $5,000;  seven 
and  one-half  mills  on  the  excess  of  $5,000  and  less  than  $10,- 
000;  twelve  mills  on  the  excess  over  $10,000  and  less  than 
$20,000;  fifteen  mills  on  the  excess  over  $20,000  and  less  than 
$50,000 ;  twenty  mills  on  the  excess  over  $50,000  and  less  than 
$100,000;  and  thirty-three  and  one-third  mills  on  all  amounts 
over  $100,000. 

For  purposes  of  comparison  a  table  is  appended,  showing  the 
amount  of  the  tax  payable  by  individuals  and  by  corporations 
under  the  federal  statute  and  also  the  amount  of  the  tax  un- 
der the  progressive  income  tax  laws  of  the  three  states  men- 
tioned. The  reader  will  notice  that  -the  "amount  of  taxable 
income"  in  the  first  column  does  not  mean  gross  income,  but 
the  net  income  on  which  the  tax  will  be  payable  after  de- 
ducting all  exemptions  and  allowances.  A  glance  at  the  table 
will  show  that  the  progressive  feature  of  the  tax  is  applied 
with  the  greatest  severity  under  the  act  of  Congress,  but 
with  Wisconsin  a  close  second  in  its  application  to  very  large 
incomes.  Attention  may  also  be  called  to  the  striking  dis- 
parity between  the  taxes  payable  by  individuals  and  those 
payable  by  corporations  under  the  federal  statute,  when  the 
income  reaches  large  figures,  which  is  entirely  due  to  the  fact 
that,  the  tax  on  corporations  is  flat,  while  that  on  individuals 
is  progressive. 

BL.INC.TAX. — 16  (241) 


119 


INCOME    TAXATION 


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Ch.  9)       RETURN   OP    INCOME    AND    COLLECTION   OF   TAX       §  120 

§  120.     When  Tax  is  Payable 

The  act  of  Congress  provides  that  "all  persons  shall  be 
notified  of  the  amount  for  which  they  are  respectively  liable 
on  or  before  the  first  day  of  June  of  each  successive  year,  and 
said  assessments  shall  be  paid  on  or  before  the  thirtieth  day 
of  June."  But  the  penalty  for  delinquency  applies  only  to 
"sums  due  and  unpaid  after  the  thirtieth  day  of  June  in 
any  year,  and  for  ten  days  after  notice  and  demand  thereof 
by  the  collector."  Under  a  similar  provision  in  the  corpora- 
tion tax  law  of  1909,  it  was  ruled  that  the  taxes  are  due  and 
payable  ten  days  after  the  date  of  the  actual  mailing  of  the 
notice  and  demand.  But  where  a  notice  so  sent  is  not  de- 
livered in  due  time,  by  reason  of  delay  in  the  mail,  and  sat- 
isfactory evidence  of  that  fact  is  furnished,  the  penalty  will 
not  be  collected,  provided  the  full  tax  due  is  paid  to  the  col- 
lector within  ten  days  after  the  actual  receipt  of  the  notice.31 
But  if  a  notice  from  the  collector  was  mailed  to  a  delinquent 
taxpayer  in  a  franked  envelope,  properly  addressed,  bearing 
the  return  address  of  the  collector,  and  was  not  returned  by 
the  post  office  department,  the  presumption  is  that  it  was 
duly  received.32  Where  a  check  is  tendered  in  payment  of 
the  tax,  which  is  not  accepted  as  payment  by  the  collector, 
and  he  deposits  it  in  a  bank  for  collection,  the  penalty  for 
non-payment  must  be  exacted,  unless  the  collection  is  made 
and  the  tax  turned  over  to  the  collector  -within  ten  days  after 
mailing  notice  to  the  taxpayer.  It  is  immaterial  that  the 
check  was  deposited  in  due  time  for  the  collection  to  have  been 
made  if  the  bank  had  been  diligent.  And  the  fact  that  the 
particular  bank  is  a  government  depository  does  not  make  it 
an  agency  for  the  collection  of  internal  revenue  taxes,  and 
therefore  laches  on  its  part  in  the  performance  of  business 


31  Treasury  Decisions,  No.  1659. 

32  United  States  v.  General  Inspection  &  Loading  Co.,  204  Fed.  657. 

(243) 


§120  INCOME   TAXATION  (Ch.  9 

duties,  outside  of  its  functions  as  such  depository,  cannot  be 
imputed  to  the  government  or  affect  its  interests.33 

Under  the  laws  of  the  states,  income  taxes  are  generally 
made  payable  at  the  same  time  with  the  general  taxes  for  the 
year  on  real  and  personal  property. 

§  121.     Penalties  for  Delinquency  and  False  Returns 

Analyzing  and  comparing  the  various  provisions  of  the  act 
of  Congress  of  1913  with  reference  to  penalties,  it  appears 
that  the  following  rules  may  be  stated : 

1.  Failure  to  pay  the  tax  when  due,  and  for  ten  days  after 
notice  and  demand  thereof  by  the  collector,  will  subject  the 
taxpayer,  whether  an  individual  or  a  corporation,  to  a  penalty 
of  five  per  cent  of  the  amount  of  the  tax  unpaid,  which  is  to 
be  added  to  that  amount,  together  with  interest  'at  the  rate 
of  one  per  cent  a  month  from  the  time  the  tax  became  due 
until  it  is  paid.     But  an  exception  is  made  in  favor  of  the 
estates  of  insane,  deceased,  and  insolvent  persons. 

2.  Neglect  or  refusal  to  make  a  return,  or  to  verify  a  re- 
turn, subjects  the  individual  taxpayer  to  a  fine  of  from  $20  to 
$1,000,  and  the  Commissioner  of  Internal  Revenue  will  add 
fifty  per  cent  to  the  amount  of  the  tax  as  assessed  by  him. 
But  if  the  omission  to  make  a  return  at  the  proper  time  was 
due  to  the  "sickness  or  absence"  of  the  taxpayer,  this  addition 
to  the  assessment  will  not  be  made,  provided  a  return  is  made 
within  the  further  time  allowed  by  the  collector,  not  exceed- 
ing thirty  days. 

3.  Certain  persons  and  corporations,  having  the  manage- 
ment of  another  person's  property,  or  having  fixed  and  deter- 
minable  payments  to  make  to  such  person  at  stated  intervals, 
exceeding  $3,000  for  any  taxable  year,  are  required  to  make 
a  return  for  such  person  and  to  withhold  and  pay  over  to 
the  government  the  amount  of  the  income  tax  thereon ;  as,  for 
example  mortgagors,  employers  paying  salaries,  testamentary 

33  Treasury  Decisions,  No.  1651. 
(244) 


Ch.  9)       RETURN   OF    INCOME   AND    COLLECTION  OF   TAX       §  121 

and  other  trustees,  executors,  receivers,  conservators,  and  dis- 
bursing officers  of  the  United  States.  And  if  any  one  sub- 
ject to  this  provision,  whether  it  be  a  "person,  corporation, 
joint  stock  company,  association,  or  insurance  company," 
shall  refuse  or  neglect  to  make  a  return  at  the  proper  time, 
a  penalty  is  imposed  of  not  less  than  $20  nor  more  than  $1,000. 

4.  If  a  corporation,  joint  stock  company  or  association,  or 
insurance  company,  liable  to  the  tax,  shall  neglect  or  refuse 
to  make  its  own  return  at  the  appointed  time,  it  is  liable  to  a 
penalty  of  not  more  than  $10,000,  and  in  addition  is  liable  to 
have  its  assessment  increased  fifty  per  cent. 

5.  If  an  individual  taxpayer  "makes  any  false  or  fraudulent 
return  or  statement  with  intent  to  defeat  or  evade  the  assess- 
ment required"  by  the  statute,  he  shall  be  guilty  of  a  mis- 
demeanor, and  be  punished  by  a  fine  not  exceeding  $2,000,  or 
imprisonment  for  not  more  than  one  year,  or  both,  in  the  dis- 
cretion of  the  court,  with  the  costs  of  prosecution.     And  in 
addition,  the  amount  of  the  tax  assessed  upon  him  shall  be 
increased  by  the  addition  of  one  hundred  per  cent. 

6.  If  the  return  made  by  or  on  behalf  of  a  corporation  is 
false  or  fraudulent,  as  above  defined,  the  officers  of  the  cor- 
poration signing  and  verifying  it  are  liable  to  the  same  pun- 
ishment as  above  prescribed  for  individuals,  and  the  assess- 
ment shall  likewise  be  increased  by  the  addition  of  one  hun- 
dred per  cent  of  its  amount,  and  further,  by  the  explicit  lan- 
guage of  the  statute,  the  corporation  itself  shall  be  liable  to  a 
penalty  of  not  more  than  $10,000. 

Under  the  Wisconsin  statute,  any  individual  taxpayer  who 
fails  or  refuses  to  make  the  required  return,  or  who  makes 
a  false  or  fraudulent  return,  is  liable  to  a  fine  of  not  more  than 
$500,  or  imprisonment  for  not  more  than  one  year,  or  both. 
In  the  case  of  a  corporation,  a  penalty  is  denounced  of  not 
less  than  $100  nor  more  than  $5,000,  at  the  discretion  of  the 
court,  for  either  failing  to  make  its  return  or  for  rendering  a 
false  or  fraudulent  return,  and  in  the  latter  case,  the  officers 

(245) 


§  121  INCOME   TAXATION  (Ch.  9 

of  the  corporation  signing  and  verifying  the  return  are  liable 
to  the  same  penalty  as  above  prescribed  for  individuals.  Fur- 
thermore, both  in  the  case  of  an  individual  and  in  that  of  a 
corporation,  and  whether  there  was  a  failure  to  make  the  re- 
turn or  a  false  or  fraudulent  return  was  filed,  if  the  revenue 
officers  discover  an  additional  amount  of  taxable  income, 
"the  amount  so  discovered  shall  be  subject  to  twice  the  orig- 
inal rate."  In  South  Carolina,  if  the  taxpayer  neglects  or 
refuses  to  make  a  return,  the  auditor  is  to  add  fifty  per  cent 
as  a  penalty  to  the  amount  of  tax  due,  and  one  hundred  per 
cent  in  the  case  of  a  false  or  fraudulent  return  having  been 
made.  In  Oklahoma,  non-payment  of  the  income  tax  when 
due  subjects  the  taxpayer  to  the  same  penalties  as  are  pro- 
vided in  the  case  of  ad  valorem  taxes,  and  false  swearing 
in  a  return  is  declared  to  be  perjury.  In  Hawaii,  "in  case  of 
any  false  or  fraudulent  return  or  valuation  by  any  taxpayer, 
the  assessor  shall  add  200  per  cent  to  the  just  valuation  of  the 
income  of  such  taxpayer,  and  the  amount  of  the  tax  assessed 
on  such  increase  shall  become  part  of  the  tax  on  the  said 
income." 

In  regard  to  the  validity  of  these  various  penalties,  there 
can  be  little  room  for  dispute.  Courts  have  often  sustained 
them  in  the  case  of  general  taxes,  and,  specifically  with  refer- 
ence to  an  income  tax,  it  has  been  held  that  the  imposition  of 
an  addition  of  100  per  cent  as  a  penalty  for  making  a  false 
or  fraudulent  return  is  not  unconstitutional.34  In  regard 
to  the  manner  of  enforcing  the  penalties,  it  is  ruled  that  the 
penalty  imposed  on  a  corporation  for  failing  to  make  the  re- 
quired return  is  to  be  recovered  by  a  civil  action  (not  by  in- 
dictment in  a  criminal  proceeding),  in  which  the  amount 
of  the  penalty  will  be  determined  by  the  court,  within  the 
limits  stated,  after  a  verdict  for  the  plaintiff.35  But  it  is 
not  within  the  jurisdiction  of  a  court  to  modify  a  penalty 

s*  Doll  v.  Evans,  9  Phila.  364,  Fed.  Gas.  No.  3,969. 
ss  Treasury  Decisions,  No.  1740. 

(246) 


Ch.  9)       RETURN    OF   INCOME    AND    COLLECTION  OP   TAX       §  122 

prescribed  for  making  a  false  return,  its  discretion  being 
confined  to  the  limits  marked  out  for  it  by  the  law.36  It  has 
also  been  held  that  an  assessor  of  internal  revenue,  on  ascer- 
taining that  the  return  made  by  a  taxpayer  was  false  and 
fraudulent,  has  power  to  reassess  the  tax  and  add  the  pen- 
alty, notwithstanding  that  the  taxpayer  has  already  paid  the 
amount  first  assessed  against  him  on  his  original  return.37 

§  122.     Lien  of  Tax 

In  Oklahoma,  it  is  expressly  provided  by  statute  that  the 
amount  due  for  income  tax  shall  be  a  lien  upon  the  real  and 
personal  property  of  the  taxpayer.  Elsewhere  the  matter  is 
left  to  be  regulated  by  the  laws  relating  to  taxes  in  general. 
As  to  the  federal  income  tax,  there  is  an  act  of  Congress, 
applicable  to  internal  revenue  taxes  in  general,  which  pro- 
vides that  "if  any  person  liable  to  pay  any  tax  neglects  or 
refuses  to  pay  the  same  after  demand,  the  amount  shall  be 
a  lien  in  favor  of  the  United  States  from  the  time  when 
the  assessment  list  was  received  by  the  collector,  except 
when  otherwise  provided,  until  paid,  with  the  interest,  pen- 
alties, and  costs  that  may  accrue  in  addition  thereto,  upon 
all  property  and  rights  belonging  to  such  person."  38  And 
the  opinion  was  given  by  the  Attorney  General  that  this 
statute  was  applicable  to  the  special  tax  on  corporations  im- 
posed by  the  act  of  1909,  and  if  so,  it  would,  for  the  same 
reasons,  be  applicable  under  the  act  of  1913.  He  ruled  that 
the  assets  of  a  corporation  are  subject  to  a  lien  for  the  pay- 
ment of  the  tax,  provided  that  the  corporation  has  not  been 
dissolved  and  all  its  assets  distributed  prior  to  the  time  the 
list  of  assessments  came  into  the  hands  of  the  collector. 


ae  Lord  Advocate  v.  McLaren,  42  Scotch  Law  Rep.  762,  5  Tax  Gas. 
110. 

sr  Doll  v.  Evans,  9  Phlla.  364,  Fed.  Cas.  No.  3,969. 

as  Rev.  Stat  U.  S.,  §  3186  (U.  S.  Conip.  St.  1901,  p.  2073),  as  amend- 
ed by  Act  Cong.  March  1,  1879,  20  Stat.  331. 

(247) 


§  123  INCOME   TAXATION  (Ch.  9 

And  even  if  a  corporation  is  dissolved  before  the  tax  falls 
due,  so  that  the  government  cannot  claim  a  lien  on  its  as- 
sets, still  the  tax  imposed  may  be  collected  by  the  govern- 
ment by  pursuing  the  assets  into  the  hands  of  the  stockhold- 
ers, in  the  same  manner  as  any  other  creditor  might  obtain 
satisfaction  of  his  debt.89 

§  123.     Process  for  Recovery  of  Tax 

The  federal  income  tax  law  of  1913  provides  that  "all  ad- 
ministrative, special,  and  general  provisions  of  law,  including 
the  laws  in  relation  to  the  assessment,  remission,  collection, 
and  refund  of  internal  revenue  taxes  not  heretofore  specifi- 
cally repealed  and  not  inconsistent  with  the  provisions  of 
this  section,  are  hereby  extended  and  made  applicable  to  all 
the  provisions  of  this  section  and  to  the  tax  herein  im- 
posed." The  laws  relating  to  the  recovery  or  collection  of 
internal  revenue  taxes  in  general  are  elaborate  and  detailed, 
and  cannot  be  here  set  out  in  full.  But  it  may  be  stated 
that  the  duty  of  collecting  these  taxes  is  imposed  upon  the 
several  collectors  of  internal  revenue,  and  that,  if  the  taxes 
are  not  paid  after  proper  demand,  they  may  proceed  by  dis- 
traint, by  seizure  and  sale  of  real  property,  or  by  suit  against 
the  delinquent  in  the  name  of  the  United  States,  according 
to  the  circumstances  of  the  case.40 

§  124.     Compromise  of  Litigation 

An  unrepealed  act  of  Congress  provides  that  "the  Com- 
missioner of  Internal  Revenue,  with  the  advice  and  consent 
of  the  Secretary  of  the  Treasury,  may  compromise  any  civil 
or  criminal  case  arising  under  the  internal  revenue  laws  in- 
stead of  commencing  suit  thereon;  and  with  the  advice  and 
consent  of  the  said  Secretary  and  the  recommendation  of  the 

3»28  Opin.  Atty.  Gen.  241. 

40  See  Rev.  Stat.  U.  S.,  §§  3183-3219  (U.  S.  Comp.  St  1901,  pp. 
2072-2086),  and  particularly  §§  3187,  3196,  3213. 

(248) 


Ch.  9)       RETURN   OF   INCOME    AND    COLLECTION  OF   TAX       §  124 

Attorney  General,  he  may  compromise  any  such  case  after 
a  suit  thereon  has  been  commenced."  41  This  was  held  ap- 
plicable to  the  penalties  imposed  by  the  corporation  tax  law 
of  1909  for  failure  to  file  the  return  required  of  corporations. 
But  the  Commissioner  of  Internal  Revenue  instructed  the 
collectors  on  this  point  as  follows*:  "Particular  attention  is 
called  to  the  fact  that  no  solicitation  of  an  offer  should  be 
made,  and  no  delinquent  should  be  induced  by  threats  to 
invoke  the  power  of  the  commissioner  to  compromise,  and 
no  assurance  should  be  given  of  the  probable  action  of  the 
commissioner  if  an  offer  is  made.  But  where  the  officers  of 
a  corporation  are  ignorant  of  a  provision  of  law  providing 
for  a  compromise  of  offenses  against  the  revenues,  and  they 
desire  to  make  an  appeal  for  clemency  in  the  manner  pro- 
vided, it  is  the  duty  of  the  collector  to  give  them  suitable 
instructions.  The  amount  to  be  offered  in  each  such  case 
must  be  left  to  the  discretion  of  the  corporation  making  the 
offer,  and  in  nowise  should  be  suggested  by  the  collector  or 
any  other  revenue  officer.  In  connection  with  the  corpora- 
tion tax  law,  this  right  of  compromise  extends  only  to  the 
penalty  prescribed  under  paragraph  8,  and  not  to  the  tax  it- 
self, nor  to  the  addition  of  fifty  per  cent  assessed."  *2  And 
on  the  application  of  this  subject  to  the  tax  imposed  by  an 
earlier  statute,  the  Supreme  Court  of  the  United  States 
said:  "The  power  intrusted  by  law  to  the  Secretary  was 
not  a  judicial  one,  but  one  of  mercy,  to  mitigate  the  severity 
of  the  law.  It  admitted  of  no  appeal  to  the  Court  of  Claims, 
or  to  any  other  court.  It  was  the  exercise  of  his  discretion 
in  a  matter  intrusted  to  him  alone,  and  from  which  there 
could  be  no  appeal."  43 

41  Rev.  Stat.  U.  S.t  §  3229  (U.  S.  Comp.  St.  1901,  p.  2089). 

42  Treasury  Decisions,  No.  1692. 

43  Dorsheimer  v.  United  States,  7  Wall.  166, 174. 

(249) 


§  125  INCOME    TAXATION  (Ch.  9 

§  125.     Collection  at  the  Source 

This  feature  of  the  federal  income  tax  law  of  1913,  copied 
in  part  from  the  English  statute,  presents  many  complexi- 
ties and  many  provisions  difficult  to  interpret  in  such  a  man- 
ner as  to  make  them  practically  effective.  The  subject  can- 
not be  understood  without  a  careful  reading  of  the  statute 
itself,  which  is  printed  in  full  in  the  appendix  to  this  volume. 
But  for  the  guidance  of  the  reader,  the  following  conclusions 
may  be  stated  as  deducible  from  an  analysis  and  comparison 
of  the  various  paragraphs  of  the  act  bearing  upon  it: 

First.  The  provision  for  collection  at  the  source  applies  only 
to  the  "normal"  income  tax,  that  is,  the  tax  of  one  per  cent 
imposed  upon  all  incomes  above  the  exempted  amount,  and 
not  to  the  super-tax  or  "additional  tax"  on  incomes  exceed- 
ing $20,000.  Hence  the  "source" — for  instance,  an  employer 
paying  a  salary,  a  mortgagor  paying  interest,  or  a  testamen- 
tary trustee  paying  over  the  annual  income  of  an  estate — is 
required  and  authorized  to  withhold  only  one  per  cent  on 
the  amount,  no  matter  how  great  the  income  may  be. 

Second.  Persons  or  corporations  having  the  management 
or  control  of  another  person's  property,  or  having  fixed  and 
determinable  payments  to  make  to  such  person  at  stated  in- 
tervals, exceeding  $3,000  for  any  taxable  year,  are  required 
to  make  a  return  for  such  person,  which  shall  include  his  name 
and  address,  or  state  that  his  name  and  address  are  unknown, 
if  such  is  the  case,  and  also  to  deduct  and  withhold  from 
payments  so  to  be  made  a  sum  sufficient  to  pay  the  normal 
income  tax,  and  pay  over  the  same  to  the  proper  federal  offi- 
cer, and  they  are  moreover  made  personally  liable  for  the 
tax.44  Those  subject  to  this  provision  include  "lessees  or 

4*  If  official  liquidators,  such  as  receivers,  trustees  in  bankruptcy, 
or  assignees  for  creditors,  pay  away  all  the  assets  of  the  corporation 
without  making  provision  for  a  debt  due  the  government  in  respect 
of  income  tax,  they  are  guilty  of  misapplying  the  assets,  and  are  per- 
sonally responsible  for  the  debt,  and  payment  of  it  may  be  enforced 
by  attachment.  In  re  Watchmakers'  Alliance,  5  Tax  Gas.  117. 

(250) 


Ch.  9)       RETURN   OF    INCOME   AND    COLLECTION  OF   TAX       §  125 

mortgagors  of  real  or  personal  property,  trustees  acting  in 
any  trust  capacity,  executors,  administrators,  agents,  receiv- 
ers, conservators,  employers,  and  all  officers  and  employes 
of  the  United  States"  having  to  do  with  the  disbursement  of 
funds.  They  may  be  either  "persons,  firms,  copartnerships, 
companies,  corporations,  joint-stock  companies  or  associations, 
or  insurance  companies."  And  the  payments  which  they 
have  to  make  to  the  third  person  may  be  in  the  nature  of 
"interest,  rent,  salaries,  wages,  premiums,  annuities,  compen- 
sation, remuneration,  emoluments,  or  other  fixed  or  determin- 
able  annual"  or  periodical  "gains,  profits,  and  income."  45  But 
this  does  not  apply  to  dividends  on  the  capital  stock,  or  paid 
out  of  the  net  earnings,  of  corporations  or  other  associations 
subject  to  the  tax,  since  the  corporation  pays  the  tax  on  its 
own  profits,  and  the  stockholder  is  allowed  to  deduct  from  his 
income  for  taxation  what  he  receives  in  the  way  of  divi- 
dends.46 

Third.  Corporations,  joint  stock  companies,  and  insurance 
companies  which  pay  interest  on  their  bonds,  mortgages,  deeds 
of  trust,  or  other  obligations  are  required  to  deduct  and  with- 
hold from  such  payments  a  sum  sufficient  to  pay  the  normal 
income  tax  assessable  against  the  several  payees,  whether  such 
payments  are  made  annually  or  at  shorter  or  longer  periods, 
and  although  such  interest,  receivable  by  any  one  payee,  does 
not  amount  to  $3,000  per  annum.  In  the  latter  case,  the  re- 
cipient of  the  income  should  clearly  be  entitled  to  the  exemp- 
tion provided  by  the  statute.  But  the  act  omits  to  prescribe 

45  In  England,  in  respect  to  dealings  between  merchants,  discount- 
ing bills  and  the  like,  and  in  loans  made  for  short  periods,  the  in- 
come tax  is  not  deducted  by  the  one  having  to  make  the  payment. 
Mosse  v.  Salt,  32  Beav.  269. 

40  So  in  England,  in  paying  dividends  on  its  stock,  a  corporation 
is  bound  to  account  to  the  Crown  for  the  income  tax  which  it  de- 
ducts from  the  dividends,  only  so  far  as  the  dividends  are  not  paid 
out  of  its  income  which  has  already  been  charged  with  the  income 
tax.  London  County  Council  v.  Attorney  General  [1901]  App.  Cas. 
26. 

(251) 


§  126  INCOME   TAXATION  (Ch.  9 

any  method  of  claiming  or  securing  the  benefit  of  the  exemp- 
tion in  this  instance,  since  the  only  provision  under  which  a 
taxpayer  whose  tax  has  been  collected  at  the  source  can  secure 
the  benefit  of  the  exemptions  and  deductions  to  which  he  may 
be  entitled  is  expressly  confined  to  the  case  of  a  "person  re- 
ceiving such  payment  of  more  than  $3,000  per  annum." 

Fourth.  \Vhereas  various  obligations,  and  particularly  bonds 
of  corporations,  are  often  issued  under  a  contract  by  which 
they  are  made  "tax  free,"  that  is,  a  contract  by  which  the 
obligor  undertakes  to  pay  all  taxes  which  may  be  assessed  on 
the  bonds,  the  act  of  Congress  provides  that  no  such  contract 
entered  into  after  the  taking  effect  of  the  act  shall  be  valid 
in  regard  to  any  federal  income  tax  imposed  upon  a  person 
liable  to  such  payment. 

Fifth.  Where  the  whole  or  part  of  a  person's  income  con- 
sists in  interest  on  bonds  of  foreign  countries,  or  interest  upon 
foreign  mortgages  or  other  like  obligations,  not  payable  in 
the  United  States,  or  dividends  upon  the  stock  (or  interest 
upon  the  obligations)  of  foreign  corporations  engaged  in  busi- 
ness in  foreign  countries,  and  where  the  payment  of  such  in- 
terest or  dividends  is  made  in  the  form  of  coupons,  checks, 
or  bills  of  exchange,  the  amount  of  the  income  tax  is  to  be 
deducted  and  withheld  therefrom  by  any  banker  or  other 
person  who  shall  sell  or  otherwise  realize  such  coupons,  etc., 
the  same  not  being  payable  in  the  United  States,  or  any  per- 
son who  shall  obtain  payment,  not  in  the  United  States,  of 
such  interest  or  dividends  in  behalf  of  another  person  by 
means  of  coupons,  etc.,  or  by  "any  dealer  in  such  coupons 
who  shall  purchase  the  same  for  any  such  dividends  or  in- 
terest (not  payable  in  the  United  States)  otherwise  than  from 
a  banker  or  another  dealer  in  such  coupons."  Persons,  firms, 
and  corporations  "undertaking  as  a  matter  of  business  or  for 
profit  the  collection  of  foreign  payments  by  means  of  coupons, 
checks,  or  bills  of  exchange"  are  required,  under  heavy  penal- 
ties, to  obtain  a  license  from  the  Commissioner  of  Internal 

(252) 


Ch.  9)       RETURN    OF   INCOME   AND    COLLECTION  OP   TAX       §  125 

Revenue,  and  are  made  subject  to  regulations  to  be  prescribed 
by  him.  This  part  of  the  statute  applies  although  the  inter- 
est or  dividends  so  collected  do  not  amount  to  more  than  $3,- 
000,  but  in  each  case  the  benefit  of  the  exemption  and  of  the 
deductions  allowed  under  the  act  may  be  obtained  as  here- 
inafter mentioned. 

Sixth.  If  the  person  whose  income  is  thus  taxed  at  the 
source  is  entitled  to  the  various  deductions  specified  in  the 
act,  or  any  of  them,  and  the  effect  of  deducting  such  items 
would  be  to  entitle  him  to  exemption  from  the  normal  in- 
come tax,  or  to  reduce  the  amount  subject  to  the  tax,  he  may 
receive  the  benefit  of  such  exemption  or  reduction  either  by 
filing  with  the  person  required  to  withhold  the  tax  and  pay 
it  to  the  government,  not  less  than  thirty  days  prior  to  the  day 
on  which  the  return  of  his  income  is  due,  a  signed  notice  claim- 
ing the  benefit  of  such  exemption,  and  a  true  and  correct  state- 
ment of  his  annual  income  from  all  other  sources,  and  of  the 
deductions  claimed,  which  notice  and  statement  shall  become 
a  part  of  the  return  to  be  made  in  his  behalf  by  the  person 
required  to  withhold  and  pay  the  tax,  or  by  making  the  ap- 
plication for  the  exemption  to  the  collector  of  the  district 
in  which  return  is  made  or  to  be  made  for  him,  and  proving 
to  the  satisfaction  of  the  collector  that  he  is  entitled  to  the 
same.  Provision  is  also  made  for  the  case  where  the  person 
is  a  minor,  insane,  absent  from  the  United  States,  or  inca- 
pacitated by  "serious  illness"  from  making  the  return  and 
application.  In  either  of  these  cases,  the  return  and  applica- 
tion may  be  made  for  him  by  the  person  required  to  withhold 
and  pay  the  tax;  but  the  latter  must  then  make  oath  that 
he  has  sufficient  knowledge  of  the  affairs  and  property  of  his 
beneficiary  to  enable  him  to  make  a  full  and  complete  return 
for  him,  and  that  the  return  and  application  so  made  are 
full  and  complete. 

Seventh.  Each  taxable  person,  making  his  own  return,  is 
•entitled  to  deduct  from  his  total  income  as  shown  thereon  "the 

(253) 


§  125  INCOME    TAXATION  (Ch.  9 

amount  of  income,  the  tax  upon  which  has  been  paid  or  with- 
held from  payment  at  the  source;  provided,  that  whenever 
the  tax  upon  the  income  of  a  person  is  required  to  be  with- 
held and  paid  at  the  source  as  herein  required,  if  such  annual 
income  does  not  exceed  the  sum  of  $3,000,  or  is  not  fixed  or 
certain,  or  is  indefinite,  or  irregular  as  to  amount  or  time  of 
accrual,  the  same  shall  not  be  deducted  in  the  personal  return 
of  such  person." 

Eighth.  The  provision  requiring  the  normal  tax  of  indi- 
viduals to  be  withheld  at  the  source  of  the  income  shall  not 
be  construed  to  require  any  of  such  tax  to  be  withheld  prior 
to  the  first  day  of  November,  1913. 

(254) 


Ch.  10)  REFUNDING   AND  BECOVERY  §  126 


CHAPTER  X 

REFUNDING    AND    RECOVERY    OF    TAXES    ILLEGALLY    EX- 
ACTED 

§  126.  Statutory  Provisions. 

127.  Payment  of  Tax  Under  Protest. 

128.  Refund  by  Commissioner  of  Internal  Revenue. 

129.  Suit  to  Enjoin  Collection  or  Payment. 

130.  Suit  for  Recovery  of  Taxes  Paid. 

131.  Same;    Appeal  to  Commissioner  as  Pre-requisite. 

132.  Remission  of  Penalties. 

§  126.     Statutory  Provisions 

As  a  general  rule,  the  income  tax  laws  make  no  specific 
provision  for  the  refund  or  recovery  of  taxes  illegally  exacted 
or  assessed  to  an  excessive  amount,  the  rights  and  remedies 
of  the  taxpayer  in  these  cases  being  governed  by  the  ordinary 
rules  of  law  applicable  in  matters  of  taxation.  In  Wisconsin, 
however,  there  is  a  provision  applicable  to  corporations  only, 
which  permits  a  company  which  is  dissatisfied  with  the  assess- 
ment of  its  income  by  the  state  tax  commission  to  bring  an 
action  against  the  state  for  the  recovery  of  so  much  of  the 
tax  paid  by  it  as  is  in  excess  of  the  amount  which  it  admits 
to  have  been  legally  chargeable  upon  it.  This  action  must  be 
brought  in  the  circuit  court  of  Dane  county,  within  six  months 
after  the  payment  of  the  tax,  and  must  be  based  on  a  petition 
alleging  facts  showing  substantial  injustice  in  the  determina- 
tion of  the  tax  commission.1  The  act  of  Congress  of  1913 
likewise  provides  that  "all  administrative,  special,  and  general 
provisions  of  law,  including  the  laws  in  relation  to  the  assess- 
ment, remission,  collection,  and  refund  of  internal  revenue 
taxes  not  heretofore  specifically  repealed  and  not  inconsistent 

i  Wisconsin  Income  Tax  Law  1911,  §  1087m,  subd.  13 ;  Laws  Wis. 
1903,  c.  315,  §  20,  as  amended  by  Laws  Wis.  1905,  c.  216,  §  5. 

(255) 


§127  INCOME   TAXATION  (Ch.  10 

with  the  provisions  of  this  section,  are  hereby  extended  and 
made  applicable  to  all  the  provisions  of  this  section  and  to  the 
tax  herein  imposed."  2 

§  127.     Payment  of  Tax  Under  Protest 

It  is  a  general  principle  of  law,  applicable  to  income  taxes 
as  well  as  to  any  others,  that  after  a  taxpayer  has  exhausted 
his  lawful  remedies  to  induce  the  administrative  officers  to 
cancel  or  reduce  an  assessment  which  he  considers  illegal 
or  unjust  in  whole  or  in  part,  he  must  then  pay  the  tax,  but 
may  save  his  right  to  bring  an  action  for  its  recovery  by  ac- 
companying his  payment  with  a  protest,  addressed  to  the  offi- 
cer charged  with  the  collection  of  the  tax.  This  rule  was  held 
applicable  to  the  corporation  excise  tax  law  of  1909,  and  a 
ruling  was  made  'that,  no  particular  form  of  protest  having 
been  prescribed,  any  form  would  be  sufficient  if  filed  before 
the  payment  of  the  tax,  and  the  collectors  of  internal  revenue 
were  specially  warned  that  the  right  of  protest  must  not  be 
denied.  In  a  case  arising  under  this  statute,  it  appeared  that, 
the  plaintiff  corporation  having  failed  to  pay  the  tax  assessed 
against  it,  a  writ  of  distraint  was  issued  by  the  collector,  and, 
the  corporation  having  been  notified  that  the  tax  would  be  col- 
lected by  levy,  the  deputy  collector  took  from  a  representa- 
tive of  the  corporation  the  amount  of  the  tax,  against  the 
verbal  protest  of  the  corporate  officer  at  the  time,  and  a  writ- 
ten notice  of  protest  then  served,  in  which  the  corporation 
denied  that  it  was  liable  to  the  tax.  It  was  held  that  the 
protest  was  sufficient  to  entitle  the  corporation  to  recover  the 
amount  from  the  collector,  on  its  being  determined  that  the 
corporation  was  not  within  the  law.  The  court  said :  "Where 
the  tax  is  paid  under  such  circumstances  that  the  terms  of 
protest  are  understood  and  sufficiently  expressed  to  be  brought 
to  the  notice  of  the  government,  and  where  the  levy  is  used 

*  Federal  Income  Tax  Law  1913,  §  2,  subd.  "M." 
(256) 


Ch.  10)  REFUNDING   AND   BECOVEBY  §  129 

merely  to  protect  the  government  officer  in  acting  under  the 
statute,  an  action  may  be  maintained  to  recover  the  tax."  3 

§  128.     Refund  by  Commissioner  of  Internal  Revenue 

The  general  laws  applicable  to  the  collection  of  United 
States  internal  revenue  taxes  contain  a  provision  (not  repealed 
by  the  act  of  Congress  of  1913)  under  which  a  taxpayer  may 
obtain  a  refund  of  taxes  which  he  should  not  have  been  re- 
quired to  pay,  without  the  necessity  of  an  action  at  law.  This 
section  reads  as  follows:  "The  Commissioner  of  Internal 
Revenue,  subject  to  regulations  prescribed  by  the  Secretary 
of  the  Treasury,  is  authorized,  on  appeal  to  him  made,  to 
remit,  refund,  and  pay  back  all  taxes  erroneously  or  illegally 
assessed  or  collected,  all  penalties  collected  without  authority, 
and  all  taxes  that  appear  to  be  unjustly  assessed  or  excessive 
in  amount,  or  in  any  manner  wrongfully  collected.  Provided, 
that  where  a  second  assessment  is  made  in  case  of  a  list, 
statement,  or  return  which,  in  the  opinion  of  the  collector  or 
deputy  collector,  was  false  or  fraudulent,  or  contained  any 
understatement  or  undervaluation,  such  assessment  shall  not 
be  remitted,  nor  shall  taxes  collected  under  such  assessment 
be  refunded  or  paid  back,  unless  it  is  proved  that  said  list, 
statement,  or  return  was  not  false  or  fraudulent,  and  did  not 
contain  any  understatement  or  undervaluation."  * 

§  129.     Suit  to  Enjoin  Collection  or  Payment 

As  a  general  rule,  if  the  assessment  of  a  tax  upon  a  per- 
son's income  is  not  made  in  legal  form,  or  is  otherwise  dis- 
puted, the  remedy  of  the  person  aggrieved  is  at  law,  and  not 
in  equity.5  And  the  laws  of  the  United  States  expressly  pro- 
vide that  "no  suit  for  the  purpose  of  restraining  the  assess- 

a  Abrast  Realty  Co.  v.  Maxwell,  206  Fed.  333.  And  see  Treasury 
Decisions,  No.  1742,  par.  41. 

4  Rev.  Stat.  U.  S.,  §  3220  (U.  S.  Cornp.  St.  1901,  p.  2086). 
o  Magee  v.  Denton,  5  Blatchf.  130,  Fed.  Cas.  No.  8,943. 

BL.INC.TAX—  17  (257) 


§•129  INCOME   TAXATION  (Ch.  10 

ment  or  collection  of  any  tax  shall  be  maintained  in  any 
court."  6  Notwithstanding  this,  in  the  case  in  which  the  con- 
stitutionality of  the  income  tax  act  of  Congress  of  1894  was 
assailed,  the  Supreme  Court  held  that  a  federal  court,  as  a 
court  of  equity,  may  restrain  a  corporation,  at  the  suit  of  one 
of  its  stockholders,  from  voluntarily  making  returns  for  the 
imposition  of,  and  paying,  an  unconstitutional  tax  levied  un- 
der an  act  of  Congress,  on  the  ground  of  the  breach  of  trust 
or  duty  in  such  misapplication  or  diversion  of  the  corporate 
funds,  and  on  allegations  of  threatened  multiplicity  of  suits 
and  irreparable  injury,  where  the  objection  of  adequate  reme- 
dy at  law  is  not  raised,  and  the  question  of  jurisdiction  is 
waived,  so  far  as  it  is  within  the  power  of  the  government  to 
do  so.7  But  since  then  it  has  been  held,  and  apparently  with 
better  reason,  that  a  corporation  had  an  adequate  remedy  at 
law  to  recover  an  internal  revenue  tax  assessed  against  its 
income  under  the  act  of  1909,  by  paying  the  tax  under  protest 
and  then  suing  for  its  recovery,  and  hence  a  stockholder  could 
not  maintain  a  suit  to  restrain  the  corporation  from  paying 
the  tax,  on  the  ground  that  the  corporation  was  not  subject 
to  assessment.8  A  similar  question  was  raised  before  the  Su- 
preme Court  of  Wisconsin,  in  the  case  in  which  the  validity 
of  the  income  tax  law  of  that  state  of  1911  was  tested.  But 
it  was  held  that  where  a  state  statute,  creating  an  income 
tax,  works  an  important  change  in  the  general  taxation  policy 
of  the  state,  and  is  intended  to  supersede  the  taxation  of  per- 
sonal property  previously  existing  and  to  provide  an  income 
tax  in  its  stead,  and  such  act  is  claimed  to  be  unconstitutional, 
this  claim  involves  the  interests  of  the  whole  people  of  the 
state,  so  as  to  authorize  the  Supreme  Court,  at  the  instance  of 


e  Rev.  Stat.  U.  S.,  §  3224  (U.  S.  Comp.  St.  1901,  p.  2088). 

t  Pollock  v.  Farmers'  Loan  &  Trust  Co.,  157  U.  S.  429,  15  Sup.  Ct. 
673,  39  L.  Ed.  759.  But  on  this  point  there  was  an  emphatic  dissent 
by  Mr.  Justice  White,  now  Chief  Justice,  and  Mr.  Justice  Harlan. 

s  Straus  v.  Abrast  Realty  Co.,  200  Fed.  327. 

(258) 


Ch.  10)  BEFUNDING   AND   RECOVERY  §  130 

a  private  relator,  to  take  original  jurisdiction  to  restrain  the 
officers  of  the  state,  charged  with  the  enforcement  of  such 
law,  from  taking  steps  to  enforce  the  same,  and  from  ex- 
pending the  public  funds  in  such  enforcement,  until  the  ques- 
tion of  the  constitutionality  of  the  statute  shall  have  been 
determined.9 

§  130.     Suit  for  Recovery  of  Taxes  Paid 

The  general  provisions  of  the  United  States  internal  reve- 
nue laws  do  not  explicitly  authorize  the  maintenance  of  a 
suit  for  the  recovery  back  of  such  taxes  when  illegally  or 
improperly  exacted,  but  they  do  so  by  clear  and  necessary 
implication,  since  they  provide  for  the  reimbursement  of  a 
collector  for  "sums  of  money  recovered  against  him  in  any 
court  for  any  internal  taxes  collected  by  him;"  prescribed 
the  burden  of  proof  in  suits  for  the  recovery  of  taxes  assess- 
ed after  the  rendering  of  an  alleged  false  return;  forbid  the 
maintenance  of  such  a  suit  until  after  an  appeal  shall  have 
been  taken  to  the  Commissioner  of  Internal  Revenue;  and 
set  up  a  limitation  of  two  years  against  "any  suit  or  proceed- 
ing for  the  recovery  of  any  internal  tax."  10  And  in  accord- 
ance with  these  general  provisions,  it  is  held  that  a  United 
States  district  court  has  jurisdiction  of  an  action  to  recover 
money  paid  to  the  United  States  under  an  erroneous  assess- 
ment as  an  internal  revenue  tax  and  penalty.11  Besides 
which,  the  Federal  Judicial  Code  of  1911  (§  24)  provides  that 
district  courts  of  the  United  States  shall  have  original  juris- 
diction of  "all  cases  arising  under  any  law  providing  for  in- 
ternal revenue."  And  under  recent  legislation  of  Congress, 

»  State  v.  Frear,  148  Wis.  456,  134  N.  W.  673,  26  Am.  &  Eng.  Ann. 
Cas.  1147. 

10  Rev.  Stat.  U.  S.,  §§  3220,  3225,  3226,  3227  (U.  S.  Comp.  St.  1901, 
pp.  2086,  2088,  2089).     And  see  Hastings  v.   Herold,  184  Fed.  759; 
United  States  v.  Barnes,  222  U.  S.  513,  32  Sup.  Ct.  117,  56  L.  Ed.  291. 

11  Dooley  v.  United  States,  182  U.  S.  222,  21  Sup.  Ct.  762,  45  L.  Ed. 
1074;   United  States  v.  Finch,  201  Fed.  95. 

(259) 


§  131  INCOME   TAXATION  (Ch.  10 

a  suit  to  recover  taxes  alleged  to  have  been  wrongfully  assess- 
ed and  collected  under  the  internal  revenue  laws  may  be 
brought  directly  against  the  United  States,  instead  of  against 
the  collector,12  though  the  latter  is  more  usually  made  the  de- 
fendant. In  this  case,  if  judgment  goes  against  a  collector  of 
internal  revenue  for  taxes  paid  under  protest,  costs  incurred 
before  judgment  and  before  any  certificate  of  probable  cause 
was  granted  are  properly  awarded  against  him  and  also  the 
judgment  may  properly  include  interest.13 

§  131.  Same;  Appeal  to  Commissioner  as  Pre-requisite 
The  internal  revenue  laws  provide  that  ""no  suit  shall  be 
maintained  in  any  court  for  the  recovery  of  any  internal  tax 
alleged  to  have  been  erroneously  or  illegally  assessed  or  col- 
lected, or  of  any  penalty  claimed  to  have  been  collected  with- 
out authority,  or  of  any  sum  alleged  to  have  been  excessive 
or  in  any  manner  wrongfully  collected,  until  appeal  shall  have 
been  duly  made  to  the  Commissioner  of  Internal  Revenue, 
according  to  the  provisions  of  law  in  that  regard,  and  the  reg- 
ulations of  the  Secretary  of  the  Treasury  established  in  pur- 
suance thereof,  and  a  decision  of  the  Commissioner  has  been 
had  therein :  Provided,  that  if  such  decision  is  delayed  more 
than  six  months  from  the  date  of  such  appeal,  then  the  said 
suit  may  be  brought,  without  first  having  a  decision  of  the 
Commissioner,  at  any  time  within  the  period  limited  in  the 
next  section,"  that  is  to  say,  "within  two  years  next  after 
the  cause  of  action  accrued"  or  within  one  year  after  a  de- 
cision rendered  by  the  Commissioner.14  This  statute  is 
mandatory,  and  the  party  aggrieved  must  pursue  the  remedy 

12  Emery,  Bird,  Thayer  Realty  Co.  v.  United  States,  198  Fed.  242; 
Christie-Street  Commission  Co.  v.  United  States,  136  Fed.  326,  69  C. 
C.  A.  464. 

is  Treat  v.  Farmers'  Loan  &  Trust  Co.,  185  Fed.  760,  108  C.  C. 
A.  98. 

i*  Rev.  Stat.  U.  S.,  §§  3226,  3227  (U.  S.  Comp.  St.  1901,  pp.  20SS, 
2089). 

(260) 


Ch.  10)          EEFUNDING  AND  RECOVERY  §  132 

here  prescribed  before  he  can  resort  to  a  court  either  of  law 
or  equity  for  relief.15  It  was  at  one  time  held  in  Connecticut 
that  this  statute  did  not  operate  to  prevent  the  maintenance 
of  such  suits  in  the  courts  of  the  state.16  But  the  Supreme 
Court  of  the  United  States  decided  that  it  was  applicable  to 
all  courts,  state  as  well  as  federal.17  Where,  after  the  assess- 
ment of  an  internal  revenue  tax,  alleged  to  be  illegal,  applica- 
tion is  made  to  the  Commissioner  of  Internal  Revenue  for 
review,  and  he  overrules  the  application  and  refuses  to  abate 
the  tax,  it  is  held  that  this  is  a  sufficient  compliance  with  the 
statute,  and  the  plaintiff  is  not  bound,  after  paying  the  tax, 
to  appeal  again  to  the  Commissioner  as  a  condition  precedent 
to  his  right  to  sue  the  collector  for  the  recovery  of  the  tax.18 

§  132.     Remission  of  Penalties 

The  corporation  excise  tax  law  of  1909  was  amended  by  an 
act  of  Congress,  March  3,  1913,  providing  that  a  corporation 
which  had  been  charged  with  an  additional  tax  imposed  as 
a  penalty  for  neglect  to  file  its  return  in  due  season,  might 
apply  to  the  Commissioner  of  Internal  Revenue  for  a  refund 
of  such  additional  tax,  within  a  year  after  the  passage  of  the 
act  or  within  a  year  after  date  of  notice  of  the  assessment. 
"And  the  Commissioner  of  Internal  Revenue,  with  the  advice 
and  consent  of  the  Solicitor  of  Internal  Revenue,  is  hereby 
directed  to  remit,  abate,  and  pay  back  all  such  additional 
taxes,  in  excess  of  $100  for  any  single  year,  whenever  in  any 
case  it  appears  to  his  satisfaction  that  the  additional  tax  was 
assessed  or  imposed  solely  because  of  a  neglect  to  make  a  re- 
turn at  the  time  or  times  specified  in  said  act,  and  without  any 
intention  or  design  on  the  part  of  any  officer  of  such  corpora- 
tion to  hinder  or  delay  the  United  States  in  the  collection  of 
the  tax  originally  assessed." 

15  Magee  v.  Den  ton,  5  Blatchf.  130,  Fed.  Cas.  No.  8,943. 
ic  Hubbard  v.  Brainard,  35  Conn.  563. 
IT  Collector  v.  Hubbard,  12  Wall.  1,  20  L.  Ed.  272. 
is  Weaver  v.  Ewers,  195  Fed.  247,  115  C.  C.  A.  219. 

(261) 


§  132  INCOME    TAXATION  (Ch.  10 

It  is  doubtful  whether  or  not  this  supplementary  or  amend- 
atory act  is  repealed  by  the  act  of  1913.  But  if  it  should  be 
so  held,  still  the  taxpayer  has  his  remedy  under  the  general 
provisions  of  the  internal  revenue  laws,  which  authorizes  the 
refund  by  the  Commissioner  (or  the  recovery  by  suit),  not  only 
of  the  tax  collected,  but  also  of  "all  penalties  collected  with- 
out authority."  19 

i»  Rev.  Stat.  U.  S.,  §§  3220,  3226,  3227  (U.  S.  Comp.  St.  1901,  pp. 
2086,  2088,  2089). 

(262) 


APPENDIX 


(263)' 


Appdx.)  INCOME    TAX    LAW  OF    1913 


UNITED  STATES  INCOME  TAX  LAW  OF  1913 

[This  enactment  constitutes  the  second  section  of  the  Tariff  Act  of 
1913,  the  title  of  the  whole  statute  being  "An  Act  to  Reduce  Tariff 
Duties  and  to  Provide  Revenue  for  the  Government,  and  For  Other 
Purposes."] 

Section  II 
A.  Subdivision  1.    That  there  shall  be  levied,  assessed,  col-   Rat.e  ?f  nor- 

mal    tax. 

lected,  and  paid  annually  upon  the  entire  net  income  arising 
or  accruing  from  all  sources  in  the  preceding  calendar  year 
to  every  citizen  of  the  United  States,  whether  residing  at 
home  or  abroad,  and  to  every  person  residing  in  the  United 
States,  though  not  a  citizen  thereof,  a  tax  of  1  per  centum 
per  annum  upon  such  income  except  as  hereinafter  provided ; 
and  a  like  tax  shall  be  assessed,  levied,  collected,  and  paid 
annually  upon  the  entire  net  income  from  all  property  owned 
and  of  every  business,  trade,  or  profession  carried  on  in  the 
United  States  by  persons  residing  elsewhere. 

Subdivision  2.  In  addition  to  the  income  tax  provided  un-  Rates  of  ad- 
der this  section  (herein  referred  to  as  the  normal  income  tax)  on 
there  shall  be  levied,  assessed,  and  collected  upon  the  net  in-  als' 
come  of  every  individual  an  additional  income  tax  (herein  re- 
ferred to  as  the  additional  tax)  of  1  per  centum  per  annum 
upon  the  amount  by  which  the  total  net  income  exceeds  $20,- 
000  and  does  not  exceed  $50,000,  and  2  per  centum  per  annum 
upon  the  amount  by  which  the  total  net  income  exceeds  $50,- 
000  and  does  not  exceed  $75,000,  3  per  centum  per  annum 
upon  the  amount  by  which  the  total  net  income  exceeds  $75,- 
000  and  does  not  exceed  $100,000,  4  per  centum  per  annum 
upon  the  amount  by  which  the  total  net  income  exceeds  $100,- 
000  and  does  not  exceed  $250,000,  5  per  centum  per  annum 
upon  the  amount  by  which  the  total  net  income  exceeds  $250,- 
000  and  does  not  exceed  $500,000,  and  6  per  centum  per  an- 
num upon  the  amount  by  which  the  total  net  income  exceeds 

(265) 


INCOME    TAXATION  (Appdx. 

$500,000.  All  the  provisions  of  this  section  relating  to  indi- 
viduals who  are  to  be  chargeable  with  the  normal  income  tax, 
so  far  as  they  are  applicable  and  are  not  inconsistent  with  this 
subdivision  of  paragraph  A,  shall  apply  to  the  levy,  assess- 
ment, and  collection  of  the  additional  tax  imposed  under  this 

Sditiona/°r  section.  Every  person  subject  to  this  additional  tax  shall,  for 
the  purpose  of  its  assessment  and  collection,  make  a  personal 
return  of  his  total  net  income  from  all  sources,  corporate  or 
otherwise  for  the  preceding  calendar  year  under  rules  and  reg- 
ulations to  be  prescribed  by  the  Commissioner  of  Internal 

j£ctmto  Sad-    Revenue  and  approved  by  the  Secretary  of  the  Treasury.    For 

ditionai  tax.  the  purpose  of  this  additional  tax  the  taxable  income  of  any  in- 
dividual shall  embrace  the  share  to  which  he  would  be  entitled 
of  the  gains  and  profits,  if  divided  or  distributed,  whether  divid- 
ed or  distributed  or  not,  of  all  corporations,  joint  stock  compa- 
nies, or  corporations  however  created  or  organized,  formed  or 
fraudulently  availed  of  for  the  purpose  of  preventing  the  im- 
position of  such  tax  through  the  medium  of  permitting  such 
gains  and  profits  to  accumulate  instead  of  being  divided  or  dis- 
tributed; and  the  fact  that  any  such  corporation,  joint  stock 
company,  or  association  is  a  mere  holding  company,  or  that  the 
gains  and  profits  are  permitted  to  accumulate  beyond  the  rea- 
sonable needs  of  the  business  shall  be  prima  facie  evidence  of  a 
fraudulent  purpose  to  escape  such  tax;  but  the  fact  that  the 
gains  and  profits  are  in  any  case  permitted  to  accumulate  and 
become  surplus  shall  not  be  construed  as  evidence  of  a  purpose 
to  escape  the  said  tax  in  such  case  unless  the  Secretary  of  the 
Treasury  shall  certify  that  in  his  opinion  such  accumulation  is 
unreasonable  for  the  purposes  of  the  business.  When  request- 
ed by  the  Commissioner  of  Internal  Revenue,  or  any  district 
collector  of  internal  revenue,  such  corporation,  joint  stock 
company,  or  association  shall  forward  to  him  a  correct  state- 
ment of  such  profits  and  the  names  of  the  individuals  who 
would  be  entitled  to  the  same  if  distributed. 

sources    of       B.  That,  subject  only  to  such  exemptions  and  deductions  as 

taxable     in-  .      f  ,  .  , 

come.  are  hereinafter  allowed,  the  net  income  of  a  taxable  person 

(266) 


Appdx.)  INCOME    TAX    LAW  OP    1913 

shall  include  gains,  profits,  and  income  derived  from  salaries, 
wages,  or  compensation  for  personal  service  of  whatever  kind 
and  in  whatever  form  paid,  or  from  professions,  vocations, 
businesses,  trade,  commerce,  or  sales  or  dealings  in  property, 
whether  real  or  personal,  growing  out  of  the  ownership  or 
use  of  or  interest  in  real  or  personal  property,  also  from  in- 
terest, rent,  dividends,  securities,  or  the  transaction  of  any  law- 
ful business  carried  on  for  gain  or  profit,  or  gains  or  profits 
and  income  derived  from  any  source  whatever,  including  the 
income  from  but  not  the  value  of  property  acquired  by  gift, 
bequest,  devise,  or  descent:  Provided,  That  the  proceeds  of 
life  insurance  policies  paid  upon  the  death  of  the  person  in- 
sured or  payments  made  by  or  credited  to  the  insured,  on  life 
insurance,  endowment,  or  annuity  contracts,  upon  the  return 
thereof  to  the  insured  at  the  maturity  of  the  term  mentioned 
in  the  contract,  or  upon  surrender  of  the  contract,  shall  not 
be  included  as  income. 

That  in  computing  net  income  for  the  purpose  of  the  normal  Deduction 
tax  there  shall  be  allowed  as  deductions :  First,  the  necessary  t«L  n 
expenses  actually  paid  in  carrying  on  any  business,  not  includ- 
ing personal,  living,  or  family  expenses;  second,  all  interest 
paid  within  the  year  by  a  taxable  person  on  indebtedness; 
third,  all  national,  State,  county,  school,  and  municipal  taxes 
paid  within  the  year,  not  including  those  assessed  against  local 
benefits;  fourth,  losses  actually  sustained  during  the  year,  in- 
curred in  trade  or  arising  from  fires,  storms,  or  shipwreck,  and 
not  compensated  for  by  insurance  or  otherwise;  fifth,  debts 
due  to  the  taxpayer  actually  ascertained  to  be  worthless  and 
charged  off  within  the  year ;  sixth,  a  reasonable  allowance  for 
the  exhaustion,  wear  and  tear  of  property  arising  out  of  its 
use  or  employment  in  the  business,  not  to  exceed,  in  the  case 
of  mines,  5  per  centum  of  the  gross  value  at  the  mine  of  the 
output  for  the  year  for  which  the  computation  is  made :  But 
no  deduction  shall  be  made  for  any  amount  of  expense  of  re- 
storing property  or  making  good  the  exhaustion  thereof  for 

(267) 


INCOME    TAXATION 


(Appdx. 


Income 
from     prop- 
erty of  non- 
residents. 


Exemptions. 


Deductions 
from 

amount    of 
net    Income. 


which  an  allowance  is  or  has  been  made :  Provided,  that  no 
deduction  shall  be  allowed  for  any  amount  paid  out  for  new 
buildings,  permanent  improvements,  or  betterments,  made  to 
increase  the  value  of  any  property  or  estate;  seventh,  the 
amount  received  as  dividends  upon  the  stock  or  from  the  net 
earnings  of  any  corporation,  joint  stock  company,  association, 
or  insurance  company  which  is  taxable  upon  its  net  income  as 
hereinafter  provided;  eighth,  the  amount  of  income,  the  tax 
upon  which  has  been  paid  or  withheld  for  payment  at  the 
source  of  the  income,  under  the  provisions  of  this  section,  pro- 
vided that  whenever  the  tax  upon  the  income  of  a  person  is 
required  to  be  withheld  and  paid  at  the  source  as  hereinafter 
required,  if  such  annual  income  does  not  exceed  the  sum  of 
$3,000  or  is  not  fixed  or  certain,  or  is  indefinite,  or  irregular 
as  to  amount  or  time  of  accrual,  the  same  shall  not  be  deducted 
in  the  personal  return  of  such  person. 

The  net  income  from  property  owned  and  business  carried 
on  in  the  United  States  by  persons  residing  elsewhere  shall 
be  computed  upon  the  basis  prescribed  in  this  paragraph  and 
that  part  of  paragraph  G  of  this  section  relating  to  the  com- 
putation of  the  net  income  of  corporations,  joint-stock  and 
insurance  companies,  organized,  created,  or  existing  under 
the  laws  of  foreign  countries,  in  so  far  as  applicable. 

That  in  computing  net  income  under  this  section  there 
shall  be  excluded  the  interest  upon  the  obligations  of  a  State 
or  any  political  subdivision  thereof,  and  upon  the  obliga- 
tions of  the  United  States;  also  the  compensation  of  the 
present  President  of  the  United  States  during  the  term  for 
which  he  has  been  elected,  and  of  the  judges  of  the  supreme 
and  inferior  courts  of  the  United  States  now  in  office,  and 
the  compensation  of  all  officers  and  employees  of  a  State 
or  any  political  subdivision  thereof  except  when  such  com- 
pensation is  paid  by  the  United  States  Government. 

C.  That  there  shall  be  deducted  from  the  amount  of  the 
net  income  of  each  of  said  persons,  ascertained  as  provided 

(268) 


Appdx.)  INCOME   TAX   LAW  OF    1913 

herein,  the  sum  of  $3,000,  plus  $1,000  additional  if  the  per- 
son making  the  return  be  a  married  man  with  a  wife  living 
with  him,  or  plus  the  sum  of  $1,000  additional  if  the  per- 
son making  the  return  be  a  married  woman  with  a  husband 
living  with  her;  but  in  no  event  shall  this  additional  exemp- 
tion of  $1,000  be  deducted  by  both  a  husband  and  a  wife: 
Provided,  That  only  one  deduction  of  $4,000  shall  be  made 
from  the  aggregate  income  of  both  husband  and  wife  when 
living  together. 

D.  The  said  tax  shall  be  computed  upon  the  remainder  Period  for 

.  computation 

of  said  net  income  of  each  person  subject  thereto,  accruing  of  tax. 
during  each  preceding  calendar  year  ending  December  thir- 
ty-first; Provided,  however,  that  for  the  year  ending  De- 
cember thirty-first,  nineteen  hundred  and  thirteen,  said  tax 
shall  be  computed  on  the  net  income  accruing  from  March 
first  to  December  thirty-first,  nineteen  hundred  and  thirteen, 
both  dates  inclusive,  after  deducting  five-sixths  only  of  the 
specific  exemptions  and  deductions  herein  provided  for.  On  Time  and 
or  before  the  first  day  of  March,  nineteen  hundred  and  four-  '«"». 
teen,  and  the  first  day  of  March  in  each  year  thereafter,  a 
true  and  accurate  return,  under  oath  or  affirmation,  shall  be 
made  by  each  person  of  lawful  age,  except  as  hereinafter 
provided,  subject  to  the  tax  imposed  by  this  section,  and 
having  a  net  income  of  $3,000  or  over  for  the  taxable  year,  to 
the  collector  of  internal  revenue  for  the  district  in  which  such 
person  resides  or  has  his  principal  place  of  business,  or,  in 
the  case  of  a  person  residing  in  a  foreign  country,  in  the 
place  where  his  principal  business  is  carried  on  within  the 
United  States,  in  such  form  as  the  Commissioner  of  Inter-  Form  and 

contents    of 

nal  Revenue,  with  the  approval  of  the  Secretary  of  the  Treas-  return, 
ury,  shall  prescribe,  setting  forth  specifically  the  gross 
amount  of  income  from  all  separate  sources  and  from  the 
total  thereof,  deducting  the  aggregate  items  or  expenses 
and  allowance  herein  authorized ;  guardians,  trustees,  execu- 
tors,  administrators,  agents,  receivers,  conservators,  and  all 

(269) 


INCOME    TAXATION 


(Appdx. 


persons,  corporations,  or  associations  acting  in  any  fiduciary 
capacity,  shall  make  and  render  a  return  of  the  net  income 
of  the  person  for  whom  they  act,  subject  to  this  tax,  com- 
ing into  their  custody  or  control  and  management,  and  be 
subject  to  all  the  provisions  of  this  section  which  apply  to 
individuals;  Provided,  that  a  return  made  by  one  of  two  or 
more    joint   guardians,    trustees,    executors,    administrators, 
agents,  receivers,  and  conservators,  or  other  persons  acting 
in  a  fiduciary  capacity,  filed  in  the  district  where  such  per- 
son resides,  or  in  the  district  where  the  will  or  other  in- 
strument under  which  he  acts  is  recorded,  under  such  regu- 
lations as  the  Secretary  of  the  Treasury  may  prescribe,  shall 
be  a  sufficient  compliance  with  the  requirements  of  this  para- 
Returns   by   graph;  and  also  all   persons,   firms,  companies,   copartner- 
persons,  .  .  .  .  .  . 

etc.,  having   ships,  corporations,   joint  stock  companies   or  associations, 

control,  etc.,  '    J  . 

of  income  of  and  insurance  companies,  except  as  hereinafter  provided,  in 
-  whatever  capacity  acting,  having  the  control,  receipt,  dis- 
posal, or  payment  of  fixed  or  determinable  annual  or  period- 
ical gains,  profits,  and  income  of  another  person  subject  to 
tax,  shall  in  behalf  of  such  person  deduct  and  withhold  from 
the  payment  an  amount  equivalent  to  the  normal  income  tax 
upon  the  same  and  make  and  render  a  return,  as  aforesaid, 
but  separate  and  distinct,  of  the  portion  of  the  income  of 
each  person  from  which  the  normal  tax  has  been  thus  with- 
held, and  containing  also  the  name  and  address  of  such  per- 
son or  stating  that  the  name  and  address  or  the  address,  as 
the  case  may  be,  are  unknown ;  Provided,  that  the  provision 
requiring  the  normal  tax  of  individuals  to  be  withheld  at 
the  source  of  the  income  shall  not  be  construed  to  require 
any  of  such  tax  to  be  withheld  prior  to  the  first  day  of  No- 
vember, 1913 :  Provided  further,  that  in  either  case  above 
mentioned  no  return  of  income  not  exceeding  $3,000  shall 
Returns  by  be  required:  Provided  further,  that  any  persons  carrying 
partners.  Qn  jh)Usmess  m  partnership  shall  be  liable  for  income  tax  only 
in  their  individual  capacity,  and  the  share  of  the  profits  of 
(270) 


Appdx.) 


INCOME    TAX    LAW  OF    1913 


a  partnership  to  which  any  taxable  partner  would  be  entitled 
if  the  same  were  divided,  whether  divided  or  otherwise,  shall 
be  returned  for  taxation  and  the  tax  paid,  under  the  pro- 
visions of  this  section,  and  any  such  firm,  when  requested 
by  the  Commissioner  of  Internal  Revenue,  or  any  district 
collector,  shall  forward  to  him  a  correct  statement  of  such 
profits  and  the  names  of  the  individuals  who  would  be  en- 
titled to  the  same,  if  distributed:  Provided  further,  that 
persons  liable  for  the  normal  income  tax  only,  on  their  own 
account  or  in  behalf  of  another,  shall  not  be  required  to 
make  return  of  the  income  derived  from  dividends  on  the 
capital  stock  or  from  the  net  earnings  of  corporations,  jc.int- 
stock  companies  or  associations,  and  insurance  companies 
taxable  upon  their  net  income  as  hereinafter  provided.  Any 
person  for  whom  return  has  been  made  and  the  tax  paid,  or 
to  be  paid  as  aforesaid,  shall  not  be  required  to  make  a  re- 
turn unless  such  person  has  other  net  income,  but  only  one 
deduction  of  $3,000  shall  be  made  in  the  case  of  any  such 
person.  The  collector  or  deputy  collector  shall  require 
every  list  to  be  verified  by  the  oath  or  affirmation  of  the 
party  rendering  it.  If  the  collector  or  deputy  collector  have 
reason  to  believe  that  the  amount  of  any  income  returned  is 
understated,  he  shall  give  due  notice  to  the  person  making 
the  return  to  show  cause  why  the  amount  of  the  return 
should  not  be  increased,  and  upon  proof  of  the  amount  un- 
derstated may  increase  the  same  accordingly.  If  dissatis- 
fied with  the  decision  of  the  collector,  such  person  may  sub- 
mit the  case,  with  all  the  papers,  to  the  Commissioner  of 
Internal  Revenue  for  his  decision,  and  may  furnish  sworn 
testimony  of  witnesses  to  prove  any  relevant  facts. 

E.  That  all  assessments  shall  be  made  by  the  Commis- 
sioner of  Internal  Revenue  and  all  persons  shall  be  notified 
of  the  amount  for  which  they  are  respectively  liable  on  or 
before  the  first  day  of  June  of  each  successive  year,  and  said 
assessments  shall  be  paid  on  or  before  the  thirtieth  day  of 

(271) 


Returns  of 
certain  divi- 
dends, etc., 
not  required. 


Returns      to 
be   verified. 


Returns  un- 
derstating 
Income. 


Assessment 
and  pay- 
ment. 


INCOME   TAXATION  (Appdx. 

June,  except  in  cases  of  refusal  or  neglect  to  make  such  re- 
turn and  in  cases  of  false  or  fraudulent  returns,  in  which 
cases  the  Commissioner  of  Internal  Revenue  shall,  upon  the 
discovery  thereof,  at  any  time  within  three  years  after  said 
return  is  due,  make  a  return  upon  information  obtained  as 
provided  for  in  this  section  or  by  existing  law,  and  the  as- 
sessment made  by  the  Commissioner  of  Internal  Revenue 
thereon  shall  be  paid  by  such  person  or  persons  immediate- 
ly upon  notification  of  the  amount  of  such  assessment;  and 
Penalty  and  to  any  sum  or  sums  due  and  unpaid  after  the  thirtieth  day 

interest     on         .    T  ,     .  .  .  ,         * 

uon-pay-  of  June  in  any  year,  and  for  ten  days  after  notice  and  de- 
mand thereof  by  the  collector,  there  shall  be  added  the  sum 
of  5  per  centum  on  the  amount  of  tax  unpaid,  and  interest  at 
the  rate  of  1  per  centum  per  month  upon  said  tax  from  the 
time  the  same  became  due,  except  from  the  estates  of  insane, 
deceased,  or  insolvent  persons. 

Payment  "ot       All   persons,    firms,    copartnerships,    companies,    corpora- 
normal    tax      .  .    .  ,  .  .     .  ,    . 
at  source.       tions,  joint-stock  companies  or  associations,  and  insurance 

companies,  in  whatever  capacity  acting,  including  lessees  or 
mortgagors  of  real  or  personal  property,  trustees  acting  in 
any  trust  capacity,  executors,  administrators,  agents,  receiv- 
ers, conservators,  employers,  and  all  officers  and  employees 
of  the  United  States  having  the  control,  receipt,  custody,  dis- 
posal, or  payment  of  interest,  rent,  salaries,  wages,  premiums, 
annuities,  compensation,  remuneration,  emoluments,  or  oth- 
er fixed  or  determinable  annual  gains,  profits,  and  income 
of  another  person,  exceeding  $3,000  for  any  taxable  year, 
other  than  dividends  on  capital  stock,  or  from  the  net  earn- 
ings of  corporations  and  joint-stock  companies  or  associa- 
tions subject  to  like  tax,  who  are  required  to  make  and  ren- 
der a  return  in  behalf  of  another,  as  provided  herein,  to  the 
collector  of  his,  her,  or  its  district,  are  hereby  authorized  and 
required  to  deduct  and  withhold  from  such  annual  gains, 
profits  and  income  such  sum  as  will  be  sufficient  to  pay  the 
normal  tax  imposed  thereon  by  this  section,  and  shall  pay 

(272) 


Appdx.) 


INCOME    TAX    LAW  OF    1913 


to  the  officer  of  the  United  States  Government  authorized 
to  receive  the  same;  and  they  are  each  hereby  made  person- 
ally liable  for  such  tax. 

In  all  cases  where  the  income  tax  of  a  person  is  withheld 
and  deducted  and  paid  or  to  be  paid  at  the  source,  as  afore- 
said, such  person  shall  not  receive  the  deduction  and  bene- 
fit of  the  exemption  allowed  in  paragraph  C  of  this  section 
except  by  an  application  for  refund  of  the  tax  unless  he  shall, 
not  less  than  thirty  days  prior  to  the  day  on  which  the  re- 
turn of  his  income  is  due,  file  with  the  person  who  is  re- 
quired to  withhold  and  pay  tax  for  him,  a  signed  notice  in 
writing  claiming  the  benefit  of  such  exemption  and  there- 
upon no  tax  shall  be  withheld  upon  the  amount  of  such  ex- 
emption :  Provided,  That  if  any  person  for  the  purpose  of 
obtaining  any  allowance  or  reduction  by  virtue  of  a  claim  for 
such  exemption,  either  for  himself  or  for  any  other  person, 
knowingly  makes  any  false  statement  or  false  or  fraudulent 
representation,  he  shall  be  liable  to  a  penalty  of  $300;  nor 
shall  any  person  under  the  foregoing  conditions  be  allowed 
the  benefit  of  any  deduction  provided  for  in  subsection  B 
of  this  section  unless  he  shall,  not  less  than  thirty  days  prior 
to  the  day  on  which  the  return  of  his  income  is  due,  either 
file  with  the  person  who  is  required  to  withhold  and  pay  tax 
for  him  a  true  and  correct  return  of  his  annual  gains,  profits, 
and  income  from  all  other  sources,  and  also  the  deductions 
asked  for,  and  the  showing  thus  made  shall  then  become  a 
part  of  the  return  to  be  made  in  his  behalf  by  the  person  re- 
quired to  withhold  and  pay  the  tax,  likewise  make  applica- 
tion for  deductions  to  the  collector  of  the  district  in  which 
return  is  made  or  to  be  made  for  him:  Provided  further, 
That  if  such  person  is  a  minor  or  an  insane  person,  or  is  ab- 
sent from  the  United  States,  or  is  unable  owing  to  serious 
illness  to  make  the  return  and  application  above  provided  for, 
the  return  and  application  may  be  made  for  him  or  her  by 
the  person  required  to  withhold  and  pay  the  tax,  he  making 
BL.INC.TAX.— 18  (273) 


Deduction 
from 

amount  of 
income, 
where  tax 
paid  at 
source. 


Penalty  for 
false  state- 
ment for  de- 
duction. 


Deduction 
for     exempt 
income, 
where  tax 
paid    at 
source. 


INCOME    TAXATION  (Appdx. 

oath  under  the  penalties  of  this  act  that  he  has  sufficient 
knowledge  of  the  affairs  and  property  of  his  beneficiary  to 
enable  him  to  make  a  full  and  complete  return  for  him  or 
her,  and  that  the  return  and  application  made  by  him  are  full 
withholding  and  complete:  Provided  further,  That  the  amount  of  the 
m?r°mai  tax  normal  tax  hereinbefore  imposed  shall  be  deducted  and  with- 
on  Interest,  held  from  fixed  and  determinable  annual  gains,  profits,  and 
than  ^ooo.  income  derived  from  interest  upon  bonds,  and  mortgages,  or 
deeds  of  trust,  or  other  similar  obligations  of  corporations, 
joint-stock  companies  or  associations,  insurance  companies, 
whether  payable  annually  or  at  shorter  or  longer  periods, 
although  such  interest  does  not  amount  to  $3,000,  subject 
to  the  provisions  of  this  section  requiring  the  tax  to  be 
withheld  at  the  source  and  deducted  from  annual  income  and 
paid  to  the  Government ;  and  likewise  the  amount  of  such  tax 
shall  be  deducted  and  withheld  from  coupons,  checks,  or  bills 
of  exchange  for  or  in  payment  of  interest  upon  bonds  of 
foreign  countries  and  upon  foreign  mortgages  or  like  obliga- 
tions (not  payable  in  the  United  States),  and  also  from  cou- 
pons, checks,  or  bills  of  exchange  for  or  in  payment  of  any 
dividends  upon  the  stock  or  interest  upon  the  obligations  of 
foreign  corporations,  associations,  and  insurance  companies 
engaged  in  business  in  foreign  countries ;  and  the  tax  in  each 
case  shall  be  withheld  and  deducted  for  and  in  behalf  of  any 
person  subject  to  the  tax  hereinbefore  imposed,  although 
such  interest,  dividends,  or  other  compensation  does  not  ex- 
ceed $3,000,  by  any  banker  or  person  who  shall  sell  or  oth- 
erwise realize  coupons,  checks,  or  bills  of  exchange  drawn 
or  made  in  payment  of  any  such  interest  or  dividends  (not 
payable  in  the  United  States),  and  any  person  who  shall  ob- 
tain payment  (not  in  the  United  States),  in  behalf  of  another 
of  such  dividends  and  interest  by  means  of  coupons,  checks, 
or  bills  of  exchange,  and  also  any  dealer  in  such  coupons 
who  shall  purchase  the  same  for  any  such  dividends  or  in- 
terest (not  payable  in  the  United  States),  otherwise  than 

(274) 


Appdx.)  INCOME    TAX    LAW  OF    1913 

from  a  banker  or  another  dealer  in  such  coupons;  but  in 
each  case  the  benefit  of  the  exemption  and  the  deduction  al- 
lowable under  this  section  may  be  had  by  complying  with 
the  foregoing  provisions  of  this  paragraph. 

All  persons,  firms,  or  corporations  undertaking  as  a  mat-  License  and 

regulation 

ter  of  business  or  for  profit  the  collection  of  foreign  pay-  of  collection 

v   J       of    foreign 

ments  of  such  interest  or  dividends  by  means  of  coupons,  payments  of 
checks,  or  bills  of  exchange  shall  obtain  a  license  from  the 
Commissioner  of  Internal  Revenue,  and  shall  be  subject  to 
such  regulations  enabling  the  Government  to  ascertain  and 
verify  the  due  withholding  and  payment  of  the  income  tax 
required  to  be  withheld  and  paid  as  the  Commissioner  of 
Internal  Revenue,  with  the  approval  of  the  Secretary  of  the 
Treasury,  shall  prescribe;  and  any  person  who  shall  under- 
take to  collect  such  payments  as  aforesaid  without  having 
obtained  a  license  therefor,  or  without  complying  with  such 
regulations,  shall  be  deemed  guilty  of  a  misdemeanor  and 
for  each  offense  be  fined  in  a  sum  not  exceeding  $5,000,  or 
imprisoned  for  a  term  not  exceeding  one  year,  or  both,  in 
the  discretion  of  the  court. 

Nothing  in  this  section  shall  be  construed  to  release  a  tax-  Person  tax- 
able not  to 
able  person  from  liability  from  income  tax  nor  shall  any  con-  be  released. 

tract  entered  into  after  this  Act  takes  effect  be  valid  in  regard 
to  any  Federal  income  tax  imposed  upon  a  person  liable  to 
such  payment. 

The  tax  herein  imposed  upon  annual  gains,  profits  and  in-  Assessment 
come  not  falling  under  the  foregoing  and  not  returned  and  paid  Snder  fofe- 
by  virtue  of  the  foregoing  shall  be  assessed  by  personal  return   !u>n!  pr° 
under  rules  and  regulations  prescribed  by  the  Commissioner    ' 
of  Internal  Revenue  and  approved  by  the  Secretary  of  the 
Treasury. 

The"  provisions  of  this  section  relating  to  the  deduction  and   Payment  at 

source,  of 

payment  of  the  tax  at  the  source  of  income  shall  only  apply   normal  tax, 
to  the  normal  tax  hereinbefore  imposed  upon  individuals. 

(275) 


INCOME    TAXATION 


(Appdx. 


Failure  to 
make  re- 
turn ;      pen- 
alty. 


False,  etc., 
return ; 
punishment. 


Normal  tax 
on  corpora- 
tions, etc. 


Exceptions 
of  certain 
organiza- 
tions, etc. 


F.  That  if  any  person,  corporation,  joint-stock  company,  as- 
sociation, or  insurance  company  liable  to  make  the  return  or  pay 
the  tax  aforesaid  shall  refuse  or  neglect  to  make  a  return  at 
the  time  or  times  hereinbefore  specified  in  each  year,  such  per- 
son shall  be  liable  to  a  penalty  of  not  less  than  $20  nor  more 
than  $1,000.    Any  person  or  any  officer  of  any  corporation  re- 
quired by  law  to  make,  render,  sign,  or  verify  any  return  who 
makes  any  false  or  fraudulent  return  or  statement  with  intent 
to  defeat  or  evade  the  assessment  required  by  this  section  to 
be  made  shall  be  guilty  of  a  misdemeanor,  and  shall  be  fined 
not  exceeding  $2,000  or  be  imprisoned  not  exceeding  one  year, 
or  both,  at  the  discretion  of  the  court,  with  the  costs  of  prose- 
cution. 

G.  (a)  That  the  normal  tax  hereinbefore  imposed  upon  in- 
dividuals likewise  shall  be  levied,  assessed,  and  paid  annually 
upon  the  entire  net  income  arising  or  accruing  from  all  sources 
during  the  preceding  calendar  year  to  every  corporation,  joint- 
stock  company  or  association,  and  every  insurance  company, 
organized  in  the  United  States,  no  matter  how  created  or  or- 
ganized, but  not  including  partnerships ;   but  if  organized,  au- 
thorized, or  existing  under  the  laws  of  any  foreign  country, 
then  upon  the  amount  of  net  income  arising  or  accruing  by  it 
from  business  transacted  and  capital  invested  within  the  Unit- 
ed States  during  such  year:  Provided,  however,  That  nothing 
in  this  section  shall  apply  to  labor,  agricultural,  or  horticul- 
tural organizations,  or  to  mutual  savings  banks  not  having  a 
capital  stock  represented  by  shares,  or  to  fraternal  beneficiary 
societies,  orders,  or  associations  operating  under  the  lodge  sys- 
tem, or  for  the  exclusive  benefit  of  the  members  of  a  frater- 
nity itself  operating  under  the  lodge  system  and  providing  for 
the  payment  of  life,  sick,  accident,  and  other  benefits  to  the 
members  of  such  societies,  orders,  or  associations  and  depend- 
ents of  such  members,  nor  to  domestic  building  and  loan  asso- 
ciations, nor  to  cemetery  companies,  organized  and  operated 

(276) 


Appdx.)  INCOME   TAX    LAW  OF    1913 

exclusively  for  the  mutual  benefit  of  their  members,  nor  to  any 
corporation  or  association  organized  and  operated  exclusively 
for  religious,  charitable,  scientific,  or  educational  purposes,  no 
part  of  the  net  income  of  which  inures  to  the  benefit  of  any 
private  stockholder  or  individual,  nor  to  business  leagues,  nor 
to  chambers  of  commerce  or  boards  of  trade,  not  organized 
for  profit  or  no  part  of  the  net  income  of  which  inures  to  the 
benefit  of  the  private  stockholder  or  individual ;  nor  to  any 
civic  league  or  organization  not  organized  for  profit,  but  op- 
erated exclusively  for  the  promotion  of  social  welfare:  Pro- 
vided further,  That  there  shall  not  be  taxed  under  this  section  Exemption 

i      •        i    r  i  i-  -i-  f  ot  lncome 

any  income  derived  from  any  public  utility  or  from  the  exer-   from  public 

.  ,  .    ,  ...  .  utility,  etc. 

cise  of  any  essential  governmental  function  accruing  to  any 
State,  Territory,  or  the  District  of  Columbia,  or  any  political 
subdivision  of  the  State,  Territory,  or  the  District  of  Colum- 
bia, nor  any  income  accruing  to  the  government  of  the  Philip- 
pine Islands  or  Porto  Rico,  or  of  any  political  subdivision  of 
the  Philippine  Islands  or  Porto  Rico:  Provided,  That  when- 
ever any  State,  Territory,  or  the  District  of  Columbia,  or  any 
political  subdivision  of  the  State  or  Territory,  has,  prior  to  the 
passage  of  this  Act,  entered  in  good  faith  into  a  contract  with 
any  person  or  corporation,  the  object  and  purpose  of  which  is 
to  acquire,  construct,  operate,  or  maintain  a  public  utility,  no 
tax  shall  be  levied  under  the  provisions  of  this  Act  upon  the 
income  derived  from  the  operation  of  such  public  utility,  so 
far  as  the  payment  thereof  will  impose  a  loss  or  burden  upon 
such  State,  Territory,  or  the  District  of  Columbia,  or  a  po- 
litical subdivision  of  a  State  or  Territory ;  but  this  provision  is 
not  intended  to  confer  upon  such  person  or  corporation  any 
financial  gain  or  exemption  or  to  relieve  such  person  or  corpo- 
ration from  the  payment  of  a  tax  as  provided  for  in  this  sec- 
tion upon  the  part  or  portion  of  the  said  income  to  which  such 
person  or  corporation  shall  be  entitled  under  such  contract. 

(277) 


INCOME    TAXATION 


(Appdx. 


Deductions 
by    corpora- 
tions,   etc. 


Expenses. 


Losses. 


Mutual     fire 
insurance 
•companies; 
premium 
•deposits. 


Mutual    ma- 
rine    insur- 
ance compa- 
nies ;    pre- 
miums. 


(&)  Such  net  income  shall  be  ascertained  by  deducting  from 
the  gross  amount  of  the  income  of  such  corporation,  joint- 
stock  company  or  association,  or  insurance  company,  received 
within  the  year  from  all  sources,  (first)  all  the  ordinary  and 
necessary  expenses  paid  within  the  year  in  the  maintenance 
and  operation  of  its  business  and  properties,  including  rentals 
or  other  payments  required  to  be  made  as  a  condition  to  the 
continued  use  or  possession  of  property;  (second)  all  losses 
actually  sustained  within  the  year  and  not  compensated  by  in- 
surance or  otherwise,  including  a  reasonable  allowance  for  de- 
preciation by  use,  wear  and  tear  of  property,  if  any;  and  in 
the  case  of  mines  a  reasonable  allowance  for  depletion  of  ores 
and  all  other  natural  deposits,  not  to  exceed  5  per  centum  of 
the  gross  value  at  the  mine  of  the  output  for  the  year  for 
which  the  computation  is  made ;  and  in  case  of  insurance  com- 
panies the  net  addition,  if  any,  required  by  law  to  be  made 
within  the  year  to  reserve  funds  and  the  sums  other  than  divi- 
dends paid  within  the  year  on  policy  and  annuity  contracts: 
Provided  further,  That  mutual  fire  insurance  companies  re- 
quiring their  members  to  make  premium  deposits  to  provide 
for  losses  and  expenses  shall  not  return  as  income  any  por- 
tion of  the  premium  deposits  returned  to  their  policyholders, 
but  shall  return  as  taxable  income  all  income  received  by  them 
from  all  other  sources  plus  such  portions  of  the  premium  de- 
posits as  are  retained  by  the  companies  for  purposes  other 
than  the  payment  of  losses  and  expenses  and  reinsurance  re- 
serves :  Provided  further,  That  mutual  marine  insurance  com- 
panies shall  include  in  their  return  of  gross  income  gross 
premiums  collected  and  received  by  them  less  amounts  paid 
for  reinsurance,  but  shall  be  entitled  to  include  in  deductions 
from  gross  income  amounts  repaid  to  policyholders  on  account 
of  premiums  previously  paid  by  them  and  interest  paid  upon 
such  amounts  between  the  ascertainment  thereof  and  the  pay- 
ment thereof  and  life  insurance  companies  shall  not  include 

(278) 


Appdx.)  INCOME    TAX   LAW  OF    1913 

as  income  in  any  year  such  portion  of  any  actual  premium  re- 
ceived from  any  individual  policyholder  as  shall  have  been  paid 
back  or  credited  to  such  individual  policyholder,  or  treated  as  an 
abatement  of  premium  of  such  individual  policyholder,  within 
such  year;  (third)  the  amount  of  interest  accrued  and  paid  interest  on 
within  the  year  on  its  indebtedness  to  an  amount  of  such  indebt-  nest 
edness  not  exceeding  one-half  of  the  sum  of  its  interest-bearing 
indebtedness  and  its  paid-up  capital  stock  outstanding  at  the 
close  of  the  year,  or  if  no  capital  stock,  the  amount  of  interest 
paid  within  the  year  on  an  amount  of  its  indebtedness  not  ex- 
ceeding the  amount  of  capital  employed  in  the  business  at  the 
close  of  the  year:  Provided,  That  in  case  of  indebtedness 
wholly  secured  by  collateral  the  subject  of  sale  in  ordinary 
business  of  such  corporation,  joint  stock  company,  or  associa- 
tion, the  total  interest  secured  and  paid  by  such  company,  cor- 
poration, or  association  within  the  year  on  any  such  indebted- 
ness may  be  deducted  as  a  part  of  its  expense  of  doing  busi- 
ness :  Provided  further,  That  in  the  case  of  bonds  or  other 
indebtedness,  which  have  been  issued  with  a  guaranty  that 
the  interest  payable  thereon  shall  be  free  from  taxation,  no  de- 
duction for  the  payment  of  the  tax  herein  imposed  shall  be 
allowed ;  and  in  the  case  of  a  bank,  banking  association,  loan, 
or  trust  company,  interest  paid  within  the  year  on  deposits  or 
on  moneys  received  for  investment  and  secured  by  interest- 
bearing  certificates  of  indebtedness  issued  by  such  bank,  bank- 
ing association,  loan  or  trust  company ;  (fourth)  all  sums  paid  Taxes, 
by  it  within  the  year  for  taxes  imposed  under  the  authority 
of  the  United  States  or  of  any  State  or  Territory  thereof,  or 
imposed  by  the  Government  of  any  foreign  country:  Pro- 
vided, That  in  the  case  of  a  corporation,  joint-stock  company  Foreign  cor- 
or  association,  or  insurance  company,  organized,  authorized,  P°;rations' 
or  existing  under  the  laws  of  any  foreign  country,  such  net 
income  shall  be  ascertained  by  deducting  from  the  gross 
amount  of  its  income  accrued  within  the  year  from  business 

(279) 


INCOME    TAXATION 


(Appdx. 


Expenses. 


Losses. 


Mutual    fire 

insurance 

companies; 

premium 

deposits. 


Mutual    ma- 
rine   insur- 
ance compa- 
nies ;    pre- 
miums. 


transacted  and  capital  invested  within  the  United  States,  (first) 
all  the  ordinary  and  necessary  expenses  actually  paid  within 
the  year  out  of  earnings  in  the  maintenance  and  operation  of 
its  business  and  property  within  the  United  States,  including 
rentals  or  other  payments  required  to  be  made  as  a  condition 
to  the  continued  use  of  possession  of  property;  (second)  all 
losses  actually  sustained  within  the  year  in  business  conducted 
by  it  within  the  United  States  and  not  compensated  by  insur- 
ance or  otherwise,  including  a  reasonable  allowance  for  depre- 
ciation by  use,  wear  and  tear  or  property,  if  any,  and  in  the 
case  of  mines  a  reasonable  allowance  for  depletion  of  ores  and 
all  other  natural  deposits,  not  to  exceed  5  per  centum  of  the 
gross  value  at  the  mine  of  the  output  for  the  year  for  which 
the  computation  is  made;  and  in  case  of  insurance  companies 
the  net  addition,  if  any,  required  by  law  to  be  made  within  the 
year  to  reserve  funds  and  the  sums  other  than  dividends  paid 
within  the  year  on  policy  and  annuity  contracts:  Provided 
further,  That  mutual  fire  insurance  companies  requiring  their 
members  to  make  premium  deposits  to  provide  for  losses  and 
expenses  shall  not  return  as  income  any  portion  of  the  premium 
deposits  returned  to  their  policyholders,  but  shall  return  as 
taxable  income  all  income  received  by  them  from  all  other 
sources  plus  such  portions  of  the  premium  deposits  as  are  re- 
tained by  the  companies  for  purposes  other  than  the  payment 
of  losses  and  expenses  and  reinsurance  reserves :  Provided 
further,  That  mutual  marine  insurance  companies  shall  include 
in  their  return  of  gross  income  gross  premiums  collected  and 
received  by  them  less  amounts  paid  for  reinsurance,  but  shall 
be  entitled  to  include  in  deductions  from  gross  income  amounts 
repaid  to  policyholders  on  account  of  premiums  previously 
paid  by  them,  and  interest  paid  upon  such  amounts  between 
the  ascertainment  thereof  and  the  payment  thereof  and  life 
insurance  companies  shall  not  include  as  income  in  any  year 
such  portion  of  any  actual  premium  received  from  any  indi- 

(280) 


Appdx.) 


INCOME    TAX    LAW  OF    1913 


vidual  policyholder  as  shall  have  been  paid  back  or  credited  to 
such  individual  policyholder,  or  treated  as  an  abatement  of 
premium  of  such  individual  policyholder,  within  such  year; 
(third)  the  amount  of  interest  accrued  and  paid  within  the 
year  on  its  indebtedness  to  an  amount  of  such  indebtedness  not 
exceeding  the  proportion  of  one-half  of  the  sum  of  its  interest- 
bearing  indebtedness  and  its  paid-up  capital  stock  outstanding 
at  the  close  of  the  year,  or  if  no  capital  stock,  the  capital 
employed  in  the  business  at  the  close  of  the  year,  which  the 
gross  amount  of  its  income  for  the  year  from  business  trans- 
acted and  capital  invested  within  the  United  States  bears  to 
the  gross  amount  of  its  income  derived  from  all  sources  within 
and  without  the  United  States :  Provided,  that  in  the  case  of 
bonds  or  other  indebtedness  which  have  been  issued  with  a 
guaranty  that  the  interest  payable  thereon  shall  be  free  from 
taxation,  no  deduction  for  the  payment  of  the  tax  herein  im- 
posed shall  be  allowed;  (fourth)  all  sums  paid  by  it  within 
the  year  for  taxes  imposed  under  the  authority  of  the  United 
States  or  of  any  State,  or  Territory  thereof,  or  the  District  of 
Columbia.  In  the  case  of  assessment  insurance  companies, 
whether  domestic  or  foreign,  the  actual  deposit  of  sums  with 
State  or  Territorial  officers,  pursuant  to  law,  as  additions  to 
guarantee  or  reserve  funds  shall  be  treated  as  being  payments 
required  by  law  to  reserve  funds. 

The  tax  herein  imposed  shall  be  computed  upon  its  entire 
net  income  accruing  during  each  preceding  calendar  year 
ending  December  thirty-first :  Provided,  however,  that  for  the 
year  ending  December  thirty-first,  nineteen  hundred  and  thir- 
teen, said  tax  shall  be  imposed  upon  its  entire  net  income 
accruing  during  that  portion  of  said  year  from  March  first  to 
December  thirty-first,  both  dates  inclusive,  to  b€  ascertained 
by  taking  five-sixths  of  its  entire  net  income  for  said  calen- 
dar year:  Provided  further,  that  any  corporation,  joint-stock 
company  or  association,  or  insurance  company  subject  to  this 
tax  may  designate  the  last  day  of  any  month  in  the  year  as 

(281) 


Interest    on 
indebted- 
ness. 


Taxes. 


Assessment 

insurance 

companies. 


Period  for 
computation 
of     tax     on 
corporation, 
etc. 


Computation 
based  on 
fiscal  year 
of    corpora- 
tion, etc. 


INCOME   TAXATION 


(Appdx. 


rime  and 
turns  byre" 
ti0ons!raetc. 


Form  and 


capital. 


indebted- 


the  day  of  the  closing  of  its  fiscal  year  and  shall  be  entitled 
to  have  the  tax  payable  by  it  computed  upon  the  basis  of  the 
net  income  ascertained  as  herein  provided  for  the  year  end- 
ing on  the  day  so  designated  in  the  year  preceding  the  date  of 
assessment  instead  of  upon  the  basis  of  the  net  income  for  the 
calendar  year  preceding  the  date  of  assessment;  and  it  shall 
give  notice  of  the  day  it  has  thus  designated  as  the  closing 
of  its  fiscal  year  to  the  collector  of  the  district  in  which  its 
principal  business  office  is  located  at  any  time  not  less  than 
thirty  days  prior  to  the  date  upon  which  its  annual  return 
shall  be  filed.  All  corporations,  joint-stock  companies  or  as- 
sociations,  and  insurance  companies  subject  to  the  tax  herein 
imposed,  computing  taxes  upon  the  income  of  the  calendar 
year,  shall,  on  or  before  the  first  day  of  March,  nineteen 
hundred  and  fourteen,  and  the  first  day  of  March  in  each  year 
thereafter,  and  all  corporations,  joint-stock  companies  or  as- 
sociations, and  insurance  companies,  computing  taxes  upon 
the  income  of  a  fiscal  year  which  it  may  designate  in  the 
manner  hereinbefore  provided,  shall  render  a  like  return  with- 
in sixty  days  after  the  close  of  its  said  fiscal  year,  and  within 
sixty  days  after  the  close  of  its  fiscal  year  in  each  year  there- 
after, or  in  the  case  of  a  corporation,  joint-stock  company  or 
association,  or  insurance  company,  organized  or  existing  un- 
der the  laws  of  a  foreign  country,  in  the  place  where  its 
principal  business  is  located  within  the  United  States,  in  such 
form  as  the  Commissioner  of  Internal  Revenue,  with  the  ap- 
by  proval  of  the  Secretary  of  the  Treasury,  shall  prescribe,  shall 
render  a  true  and  accurate  return  under  oath  or  affirmation  of 
its  president,  vice  president,  or  other  principal  officer,  and 
its  treasurer  or  assistant  treasurer,  to  the  collector  of  in- 
ternal revenue  for  the  district  in  which  it  has  its  principal 
place  of  business,  setting  forth  (first)  the  total  amount  of 
its  paid-up  capital  stock  outstanding,  or  if  no  capital  stock, 
its  capital  employed  in  business,  at  the  close  of  the  year; 
(second)  the  total  amount  of  its  bonded  and  other  indebted- 

(282) 


Appdx.) 


INCOME   TAX    LAW  OF    1913 


ness  at  the  close  of  the  year;  (third)  the  gross  amount  of  its 
income,  received  during  such  year  from  all  sources,  and  if 
organized  under  the  laws  of  a  foreign  country  the  gross 
amount  of  its  income  received  within  the  year  from  business 
transacted  and  capital  invested  within  the  United  States; 
(fourth)  the  total  amount  of  all  its  ordinary  and  necessary 
expenses  paid  out  of  earnings  in  the  maintenance  and  opera- 
tion of  the  business  and  properties  of  such  corporation,  joint- 
stock  company  or  association,  or  insurance  company  within 
the  year,  stating  separately  all  rentals  or  other  payments  re- 
quired to  be  made  as  a  condition  to  the  continued  use  or  pos- 
session of  property,  and  if  organized  under  the  laws  of  a 
foreign  country  the  amount  so  paid  in  the  maintenance  and 
operation  of  its  business  within  the  United  States ;  (fifth)  the 
total  amount  of  all  losses  actually  sustained  during  the  year 
and  not  compensated  by  insurance  or  otherwise,  stating  sepa- 
rately any  amounts  allowed  for  depreciation  of  property,  and 
in  case  of  insurance  companies  the  net  addition,  if  any,  re- 
quired by  law  to  be  made  within  the  year  to  reserve  funds  and 
the  sums  other  than  dividends  paid  within  the  year  on  policy 
and  annuity  contracts:  Provided  -further,  That  mutual  fire 
insurance  companies  requiring  their  members  to  make  pre- 
mium deposits  to  provide  for  losses  and  expenses  shall  not 
return  as  income  any  portion  of  the  premium  deposits  re- 
turned to  their  policyholders,  but  shall  return  as  taxable  in- 
come all  income  received  by  them  from  all  other  sources  plus 
such  portions  of  the  premium  deposits  as  are  retained  by  the 
companies  for  purposes  other  than  the  payment  of  losses  and 
expenses  and  reinsurance  reserves:  Provided  further,  That 
mutual  marine  insurance  companies  shall  include  in  their 
return  of  gross  income  gross  premiums  collected  and  received 
by  them  less  amounts  paid  for  reinsurance,  but  shall  be  en- 
titled to  include  in  the  deductions  from  gross  income  ajnounts 
repaid  to  policyholders  on  account  of  premiums  previously 
paid  by  them,  and  interest  paid  upon  such  amounts  between 

(283) 


Gross   In- 
come. 


Expenses. 


Losses. 


Mutual     fire 

insurance 

companies. 


Mutual   ma- 
rine    insur- 
anon  com- 
panies. 


INCOME   TAXATION  (Appdx. 

the  ascertainment  thereof  and  the  payment  thereof,  and  life 
Life    insur-    insurance  companies  shall  not  include  as  income  in  any  year 

ance  com-  ,  .  -  .  »',.«•*  •      i- 

panics.  such  portion  of  any  actual  premium  received  from  any  indi- 

vidual policyholder  as  shall  have  been  paid  back  or  credited  to 
such  individual  policyholder,  or  treated  as  an  abatement  of 
premium  of  such  individual  policyholder,  within  such  year; 

Foreign  cor-    and  in  case  of  a  corporation,  joint-stock  company  or  associa- 

porations, 

etc.  tion,  or  insurance  company,  organized  under  the  laws  of  a 

foreign  country,  all  losses  actually  sustained  by  it  during  the 
year  in  business  conducted  by  it  within  the  United  States, 
.not  compensated  by  insurance  or  otherwise,  stating  separately 
any  amounts  allowed  for  depreciation  of  property,  and  in  case 
of  insurance  companies  the  net  addition,  if  any,  required  by 
law  to  be  made  within  the  year  to  reserve  funds  and  the 
sums  other  than  dividends  paid  within  the  year  on  policy 
msur!nceflre  and  annuity  contracts:  Provided  further,  That  mutual  fire 
companies,  insurance  companies  requiring  their  members  to  make  premium 
deposits  to  provide  for  losses  and  expenses  shall  not  return  as 
income  any  portion  of  the  premium  deposits  returned  to 
their  policyholders,  but  shall  return  as  taxable  income  all  in- 
come received  by  them  from  all  other  sources  plus  such  por- 
tions of  the  premium  deposits  as  are  retained  by  the  companies 
for  purposes  other  than  the  payment  of  losses  and  expenses 

Mutual  ma-   and  reinsurance  reserves :    Provided  further,  That  mutual  ma- 
rine insur-         .  •         i     11   •      ,     i      •        ,     • 
ance  com-      rine  insurance  companies  shall  include  in  their  return  of  gross 

income  gross  premiums  collected  and  received  by  them  less 
amounts  paid  for  reinsurance,  but  shall  be  entitled  to  include 
in  deductions  from  gross  income  amounts  repaid  to  policy- 
holders  on  account  of  premiums  previously  "paid  by  them  and 
interest  paid  upon  such  amounts  between  the  ascertainment 
Life  insur-  thereof  and  the  payment  thereof,  and  life  insurance  compa- 

ance  com-  .  ,     „          ,     .      ,     , 

panics.  nies  shall  not  include  as  income  in   any  year   such  portion 

of  any  actual  premium  received  from  any  individual  policy- 
holder  as  shall  have  been  paid  back  or  credited  to  such  indi- 
vidual policyholder,  or  treated  as  an  abatement  of  premium  of 
(284) 


Appdx.) 


INCOME    TAX    LAW  OF    1913 


such  individual  policyholder,  within  such  year;  (sixth)  the  intereat 
amount  of  interest  accrued  and  paid  within  the  year  on  its 
bonded  or  other  indebtedness  not  exceeding  one-half  of  the 
sum  of  its  interest-bearing  indebtedness  and  its  paid-up  capi- 
tal stock,  outstanding  at  the  close  of  the  year,  or  if  no  cap- 
ital stock,  the  amount  of  interest  paid  within  the  year  on 
an  amount  of  indebtedness  not  exceeding  the  amount  of  cap- 
ital employed  in  the  business  at  the  close  of  the  year,  and 
in  the  case  of  a  bank,  banking  association,  or  trust  company, 
stating  separately  all  interest  paid  by  it  within  the  year  on 
deposits ;  or  in  case  of  a  corporation,  joint-stock  company  Foreign  cor- 
or  association,  or  insurance  company,  organized  under  the  etc/1  lims' 
laws  of  a  foreign  country,  interest  so  paid  on  its  bonded  or 
other  indebtedness  to  an  amount  of  such  bonded  or  other  in- 
debtedness not  exceeding  the  proportion  of  its  paid-up  capital 
stock  outstanding  at  the  close  of  the  year,  or  if  no  capital 
stock,  the  amount  of  capital  employed  in  the  business  at  the 
close  of  the  year,  which  the  gross  amount  of  its  income  for 
the  year  from  business  transacted  and  capital  invested  within 
the  United  States  bears  to  the  gross  amount  of  its  income  de- 
rived from  all  sources  within  and  without  the  United  States ; 
(seventh)  the  amount  paid  by  it  within  the  year  for  taxes  Taxes, 
imposed  under  the  authority  of  the  United  States  and  sepa- 
rately the  amount  so  paid  by  it  for  taxes  imposed  by  the  Gov- 
ernment of  any  foreign  country;  (eighth)  the  net  income  of  Net  income, 
such  corporation,  joint-stock  company  or  association,  or  in- 
surance company,  after  making  the  deductions  in  this  subsec- 
tion authorized.  All  such  returns  shall  as  received  be  trans- 
mitted forthwith  by  the  collector  to  the  Commissioner  of  In- 
ternal Revenue. 

All  assessments  shall  be  made  and  the  several  corpora-    Assessment 

.    .    f  ,  .  ...  ,    .  and   pay- 

tions,  joint-stock  companies  or  associations,  and  insurance    ment. 
companies  shall  be  notified  of  the  amount  for  which  they 
are  respectively  liable  on  or  before  the  first  day  of  June  of 
each  successive  year,  and  said  assessment  shall  be  paid  on 

(285) 


INCOME    TAXATION 


(Appdx. 


Computation 
based   on 
fiscal  year 
of    corpora- 
tion,  etc. 


Penalty   and 
interest    on 
tax  unpaid. 


Returns    fil- 
ed as  rec- 
ords. 


Inspection 
of  or  access 
to    returns. 


or  before  the  thirtieth  day  of  June:  Provided,  That  every 
corporation,  joint-stock  company  or  association,  and  in- 
surance company,  computing  taxes  upon  the  income  of  the 
fiscal  year  which  it  may  designate  in  the  manner  herein- 
before provided,  shall  pay  the  taxes  due  under  its  assess- 
ment within  one  hundred  and  twenty  days  after  the  date 
upon  which  it  is  required  to  file  its  list  or  return  of  income 
for  assessment;  except  in  cases  of  refusal  or  neglect  to 
make  such  return,  and  in  cases  of  false  or  fraudulent  re- 
turns, in  which  cases  the  Commissioner  of  Internal  Revenue 
shall,  upon  the  discovery  thereof,  at  any  time  within  three 
years  after  said  return  is  due,  make  a  return  upon  informa- 
tion obtained  as  provided  for  in  this  section  or  by  existing 
law,  and  the  assessment  made  by  the  Commissioner  of  In- 
ternal Revenue  thereon  shall  be  paid  by  such  corporation, 
joint-stock  company  or  association,  or  insurance  company 
immediately  upon  notification  of  the  amount  of  such  assess- 
ment; and  to  any  sum  or  sums  due  and  unpaid  after  the 
thirtieth  day  of  June  in  any  year,  or  after  one  hundred  and 
twenty  days  from  the  date  on  which  the  return  of  income  is 
required  to  be  made  by  the  taxpayer,  and  for  ten  days  after 
notice  and  demand  thereof  by  the  collector,  there  shall  be 
added  the  sum  of  5  per  centum  on  the  amount  of  tax  un- 
paid and  interest  at  the  rate  of  1  per  centum  per  month 
upon  said  tax  from  the  time  the  same  becomes  due. 

(d)  When  the  assessment  shall  be  made,  as  provided  in 
this  section,  the  returns,  together  with  any  corrections 
thereof  which  may  have  been  made  by  the  commissioner, 
shall  be  filed  in  the  office  of  the  Commissioner  of  Internal 
Revenue  and  shall  constitute  public  records  and  be  open  to 
inspection  as  such :  Provided,  That  any  and  all  such  returns 
shall  be  open  to  inspection  only  upon  the  order  of  the  Pres- 
ident, under  rules  and  regulations  to  be  prescribed  by  the 
Secretary  of  the  Treasury  and  approved  by  the  President : 
Provided  further,  that  the  proper  officers  of  any  State  im- 

(286) 


Appdx.) 


INCOME   TAX   LAW  OP   1913 


posing  a  general  income  tax  may,  upon  the  request  of  the 
governor  thereof,  have  access  to  said  returns  or  to  an  ab- 
stract thereof,  showing  the  name  and  income  of  each  such 
corporation,  joint-stock  company,  association  or  insurance 
company,  at  such  times  and  in  such  manner  as  the  Secre- 
tary of  the  Treasury  may  prescribe. 

If  any  of  the  corporations,  joint-stock  companies  or  as- 
sociations, or  insurance  companies  aforesaid,  shall  refuse  or 
neglect  to  make  a  return  at  the  time  or  times  hereinbefore 
specified  in  each  year,  or  shall  render  a  false  or  fraudulent 
return,  such  corporation,  joint-stock  company  or  associa- 
tion, or  insurance  company  shall  be  liable  to  a  penalty  of 
not  exceeding  $10,000. 

H.  That  the  word  "State"  or  "United  States"  when  used 
in  this  section  shall  be  construed  to  include  any  Territory, 
Alaska,  the  District  of  Columbia,  Porto  Rico,  and  the  Philip- 
pine Islands,  when  such  construction  is  necessary  to  carry 
out  its  provisions. 

J.  That  sections  thirty-one  hundred  and  sixty-seven,  thirty- 
one  hundred  and  seventy-two,  thirty-one  hundred  and  seventy- 
three,  and  thirty-one  hundred  and  seventy-six  of  the  Revised 
Statutes  of  the  United  States  as  amended  are  hereby  amended 
so  as  to  read  as  follows: 

"Sec.  3167.  It  shall  be  unlawful  for  any  collector,  deputy 
collector,  agent,  clerk,  or  other  officer  or  employee  of  the 
United  States  to  divulge  or  to  make  known  in  any  manner 
whatever  not  provided  by  law  to  any  person  the  operations, 
style  of  work,  or  apparatus  of  any  manufacturer  or  producer 
visited  by  him  in  the  discharge  of  his  official  duties,  or  the 
amount  or  source  of  income,  profits,  losses,  expenditures,  or 
any  particular  thereof,  set  forth  or  disclosed  in  any  income 
return  by  any  person  or  corporation,  or  to  permit  any  income 
return  or  copy  thereof  or  any  book  containing  any  abstract 
or  particulars  thereof  to  be  seen  or  examined  by  any  person 
except  as  provided  by  law ;  and  it  shall  be  unlawful  for  any 

(287) 


Failure  to 
make    re- 
turn,    false, 
etc.,     re- 
turn ;    pen- 
alty. 


Words 

"State" 

"United 

States," 

construed. 


R.   S.  §§ 
3167,    3172, 
3173,    3176, 
amended. 


Revenue  of- 
ficers dis- 
closing  op- 
erations   of 
manufactur- 
ers,   Income 
tax  returns, 
etc.,    pun- 
ishable. 


INCOME    TAXATION 


(Appdx. 


Canvass    of 
districts    for 
objects    of 
taxation. 


Annual     re- 
turns of  per- 
sons liable 
to  tax. 


person  to  print  or  publish  in  any  manner  whatever  not  pro- 
vided by  law  any  income  return  or  any  part  thereof  or  the 
amount  or  source  of  income  profits,  losses,  or  expenditures 
appearing  in  any  income  return ;  and  any  offense  against  the 
foregoing  provision  shall  be  a  misdemeanor  and  be  punished 
by  a  fine  not  exceeding  $1,000  or  by  imprisonment  not  ex- 
ceeding one  year,  or  both,  at  the  discretion  of  the  court ;  and 
if  the  offender  be  an  officer  or  employee  of  the  United  States 
he  shall  be  dismissed  from  office  and  be  incapable  thereafter  of 
holding  any  office  under  the  Government. 

"Sec.  3172.  Every  collector  shall,  from  time  to  time,  cause 
his  deputies  to  proceed  through  every  part  of  his  district  and 
inquire  after  and  concerning  all  persons  therein  who  are  lia- 
ble to  pay  any  internal-revenue  tax,  and  all  persons  owning 
or  having  the  care  and  management  of  any  objects  liable  to 
pay  any  tax,  and  to  make  a  list  of  such  persons  and  enumerate 
said  objects. 

"Sec.  3173.  It  shall  be  the  duty  of  any  person,  partnership, 
firm,  association,  or  corporation,  made  liable  to  any  duty, 
special  tax,  or  other  tax  imposed  by  law,  when  not  other- 
wise provided  for,  in  case  of  a  special  tax,  on  or  before  the 
thirty-first  day  of  July  in  each  year,  in  case  of  income  tax 
on  or  before  the  first  day  of  March  in  each  year,  and  in 
other  cases  before  the  day  on  which  the  taxes  accrue,  to  make 
a  list  or  return,  verified  by  oath  or  affirmation,  to  the  col- 
lector or  a  deputy  collector  of  the  district  where  located,  of 
the  articles  or  objects,  including  the  amount  of  annual  in- 
come charged  with  a  duty  or  tax,  the  quantity  of  goods,  wares, 
and  merchandise  made  or  sold  and  charged  with  a  tax,  the 
several  rates  and  aggregate  amount,  according  to  the  forms 
and  regulations  to  be  prescribed  by  the  Commissioner  of 
Internal  Revenue,  with  the  approval  of  the  Secretary  of  the 
Treasury,  for  which  such  person,  partnership,  firm,  associa- 
tion, or  corporation  is  liable:  Provided,  That  if  any  person 
liable  to  pay  any  duty  or  tax,  or  owning,  possessing,  or  hav- 

(288) 


Appdx.)  INCOME   TAX   LAW  OF    1913 

ing  the  care  or  management  of  property,  goods,  wares,  and 
merchandise,  articles  or  objects  liable  to  pay  any  duty,  tax, 
or  license,  shall  fail  to  make  and  exhibit  a  list  or  return 
required  by  law,  but  shall  consent  to  disclose  the  particulars 
of  any  and  all  the  property,  goods,  wares,  and  merchandise, 
articles,  and  objects  liable  to  pay  any  duty  or  tax,  or  any  busi- 
ness or  occupation  liable  to  pay  any  tax  as  aforesaid,  then, 
and  in  that  case,  it  shall  be  the  duty  of  the  collector  or  deputy 
collector  to  make  such  list  or  return,  which,  being  distinctly 
read,  consented  to,  and  signed  and  verified  by  oath  or  affirma- 
tion by  the  person  so  owning,  possessing,  or  having  the  care 
and  management  as  aforesaid,  may  be  received  as  the  list  of 
such  person :  Provided  further,  That  in  case  no  annual  list  or 
return  has  been  rendered  by  such  person  to  the  collector  or 
deputy  collector  as  required  by  law,  and  the  person  shall  be 
absent  from  his  or  her  residence  or  place  of  business  at  the 
time  the  collector  or  a  deputy  collector  shall  call  for  the  annual 
list  or  return,  it  shall  be  the  duty  of  such  collector  or  deputy 
collector  to  leave  at  such  place  of  residence  or  business,  with 
some  one  of  suitable  age  and  discretion,  if  such  be  present, 
otherwise  to  deposit  in  the  nearest  post  office,  a  note  or  mem- 
orandum addressed  to  such  person,  requiring  him  or  her  to 
render  to  such  collector  or  deputy  collector  the  list  or  return 
required  by  law  within  ten  days  from  the  date  of  such  note  or 
memorandum,  verified  by  oath  or  affirmation.  And  if  any  per- 
son, on  being  notified  or  required  as  aforesaid,  shall  refuse  or 
neglect  to  render  such  list  or  return  within  the  time  required 
as  aforesaid,  or  whenever  any  person  who  is  required  to  de- 
liver a  monthly  or  other  return  of  objects  subject  to  tax  fails 
to  do  so  at  the  time  required,  or  delivers  any  return  which,  in 
the  opinion  of  the  collector,  is  false  or  fraudulent,  or  contains 
any  undervaluation  or  understatement,  it  shall  be  lawful  for 
the  collector  to  summon  such  person,  or  any  other  person  hav- 
ing possession,  custody,  or  care  of  books  of  account  contain- 
ing entries  relating  to  the  business  of  such  person,  or  any  other 
BL.INC.TAX.— 19  (289) 


(Appdx. 


When  col- 
lector may 


make   re- 
turns. 


person  he  may  deem  proper,  to  appear  before  him  and  produce 
such  books,  at  a  time  and  place  named  in  the  summons,  and  to 
give  testimony  or  answer  interrogatories,  under  oath,  respect- 
ing any  objects  liable  to  tax  or  the  returns  thereof.  The  col- 
lector may  summon  any  person  residing  or  found  within  the 
State  in  which  his  district  lies ;  and  when  the  person  intended 
to  be  summoned  does  not  reside  and  can  not  be  found  within 
such  State,  he  may  enter  any  collection  district  where  such  per- 
son may  be  found  and  there  make  the  examination  herein  au- 
thorized. And  to  this  end  he  may  there  exercise  all  the  au- 
thority which  he  might  lawfully  exercise  in  the  district  for 
which  he  was  commissioned. 

"Sec.  3176.  When  any  person,  corporation,  company  or 
association  refuses  or  neglects  to  render  any  return  or  list 
required  by  law,  or  renders  a  false  or  fraudulent  return  or 
list,  the  collector  or  any  deputy  collector  shall  make,  accord- 
ing to  the  best  information  which  he  can  obtain,  including 
that  derived  from  the  evidence  elicited  by  the  examination  of 
the  collector,  and  on  his  own  view  and  information,  such  list 
or  return,  according  to  the  form  prescribed,  of  the  income, 
property,  and  objects  liable  to  tax  owned  or  possessed  or 
under  the  care  or  management  of  such  person  or  corpora- 
tion, company  or  association,  and  the  Commissioner  of  In- 
ternal Revenue  shall  assess  all  taxes  not  paid  by  stamps,  in- 
cluding the  amount,  if  any,  due  for  special  tax,  income  or 
other  tax,  and  in  case  of  any  return  of  a  false  or  fraudulent 
list  or  valuation  intentionally  he  shall  add  100  per  centum  to 
such  tax ;  and  in  case  of  a  refusal  or  neglect,  except  in  cases 
of  sickness  or  absence,  to  make  a  list  or  return,  or  to  verify 
the  same  as  aforesaid,  he  shall  add  50  per  centum  to  such  tax. 
In  case  of  neglect  occasioned  by  sickness  or  absence  as  afore- 
said the  collector  may  allow  such  further  time  for  making  and 
delivering  such  list  or  return  as  he  may  deem  necessary,  not 
exceeding  thirty  days.  The  amount  so  added  to  the  tax 
shall  be  collected  at  the  same  time  and  in  the  same  manner 

(290) 


Appdx.) 


INCOME    TAX    LAW  OF    1913 


as  the  tax  unless  the  neglect  or  falsity  is  discovered  after  the 
tax  has  been  paid,  in  which  case  the  amount  so  added  shall 
be  collected  in  the  same  manner  as  the  tax;  and  the  list  or 
return  so  made  and  subscribed  by  such  collector  or  deputy 
collector  shall  be  held  prima  facie  good  and  sufficient  for  all 
legal  purposes." 

K.  That  it  shall  be  the  duty  of  every  collector  of  internal 
revenue,  to  whom  any  payment  of  any  taxes  other  than  the 
tax  represented  by  an  adhesive  stamp  or  other  engraved 
stamp  is  made  under  the  provisions  of  this  section,  to  give 
to  the  person  making  such  payment  a  full  written  or  printed 
receipt,  expressing  the  amount  paid  and  the  particular  ac- 
count for  which  such  payment  was  made ;  and  whenever  such 
payment  is  made  such  collector  shall,  if  required,  give  a  sepa- 
rate receipt  for  each  tax  paid  by  any  debtor,  on  account  of 
payments  made  to  or  to  be  made  by  him  to  separate  creditors 
in  such  form  that  such  debtor  can  conveniently  produce  the 
same  separately  to  his  several  creditors  in  satisfaction  of 
their  respective  demands  to  the  amounts  specified  in  such  re- 
ceipts; and  such  receipts  shall  be  sufficient  evidence  in  fa- 
vor of  such  debtor  to  justify  him  in  withholding  the  amount 
therein  expressed  from  his  next  payment  to  his  creditor; 
but  such  creditor  may,  upon  giving  to  his  debtor  a  full  writ- 
ten receipt,  acknowledging  the  payment  to  him  of  whatever 
sum  may  be  actually  paid,  and  accepting  the  amount  of  tax 
paid  as  aforesaid  (specifying  the  same)  as  a  further  satisfac- 
tion of  the  debt  to  that  amount,  require  the  surrender  to  him 
of  such  collector's  receipt. 

L.  That  jurisdiction  is  hereby  conferred  upon  the  district 
courts  of  the  United  States  for  the  district  within  which  any 
person  summoned  under  this  section  to  appear  to  testify 
or  to  produce  books  shall  reside,  to  compel  such  attendance, 
production  of  books,  and  testimony  by  appropriate  process. 

M.  That  all  administrative,  special,  and  general  provi- 
sions of  law,  including  the  laws  in  relation  to  the  assessment, 

(291) 


Collectors' 
receipts    for 
taxes ;     ef- 
fect as  evi- 
dence,   etc. 


Jurisdiction 
of  district 
courts. 


Administra- 
tive, etc., 
provisions 
applicable. 


INCOME    TAXATION 


(Appdx. 


Provisions 
extended  to 
Porto     Rico 
and    Philip- 
pine Is- 
lands. 


Appropria- 
tion for  car- 
rying provi- 
sions into 
effect. 


remission,  collection,  and  refund  of  internal-revenue  taxes 
not  heretofore  specifically  repealed  and  cot  inconsistent  with 
the  provisions  of  this  section,  are  hereby  extended  and  made 
applicable  to  all  the  provisions  of  this  section  and  to  the  tax 
herein  imposed. 

N.  That  the  provisions  of  this  section  shall  extend  to 
Porto  Rico  and  the  Philippine  Islands:  Provided,  That  the 
administration  of  the  law  and  the  collection  of  the  taxes  im- 
posed in  Porto  Rico  and  the  Philippine  Islands  shall  be  by 
the  appropriate  internal-revenue  officers  of  those  govern- 
ments, and  all  revenues  collected  in  Porto  Rico  and  the  Philip- 
pine Islands  thereunder  shall  accrue  intact  to  the  general 
governments,  thereof,  respectively:  And  provided  further, 
That  the  jurisdiction  in  this  section  conferred  upon  the  dis- 
trict courts  of  the  United  States  shall,  so  far  as  the  Philip- 
pine Islands  are  concerned,  be  vested  in  the  courts  of  the  first 
instance  of  said  islands :  And  provided  further,  that  nothing 
in  this  section  shall  be  held  to  exclude  from  the  computa- 
tion of  the  net  income  the  compensation  paid  any  official  by 
the  governments  of  the  District  of  Columbia,  Porto  Rico, 
and  the  Philippine  Islands  or  the  political  subdivisions  thereof. 

O.  That  for  the  purpose  of  carrying  into  effect  the  provi- 
sions of  Section  II  of  this  Act,  and  to  pay  the  expenses  of 
assessing  and  collecting  the  income  tax  therein  imposed, 
and  to  pay  such  sums  as  the  Commissioner  of  Internal  Reve- 
nue, with  the  approval  of  the  Secretary  of  the  Treasury,  may 
deem  necessary,  for  information,  detection,  and  bringing  to 
trial  and  punishment  persons  guilty  of  violating  the  provi- 
sions of  this  section,  or  conniving  at  the  same,  in  cases  where 
such  expenses  are  not  otherwise  provided  for  by  law,  there  is 
hereby  appropriated  out  of  any  money  in  the  Treasury  not 
otherwise  appropriated  for  the  fiscal  year  ending  June  thir- 
tieth, nineteen  hundred  and  fourteen,  the  sum  of  $800,000, 
and  the  Commissioner  of  Internal  Revenue,  with  the  ap- 
proval of  the  Secretary  of  the  Treasury,  is  authorized  to  ap- 

(292) 


Appdx.) 


INCOME   TAX    LAW  OF    1913 


point  and  pay  from  this  appropriation  all  necessary  officers, 
agents,  inspectors,  deputy  collectors,  clerks,  messengers  and 
janitors,  and  to  rent  such  quarters,  purchase  such  supplies, 
equipment,  mechanical  devices,  and  other  articles  as  may  be 
necessary  for  employment  or  use  in  the  District  of  Columbia 
or  any  collection  district  in  the  United  States,  or  any  of  the 
Territories  thereof :  Provided,  That  no  agent  paid  from  this 
appropriation  shall  receive  compensation  at  a  rate  higher 
than  that  now  received  by  traveling  agents  on  accounts  in 
the  Internal  Revenue  Service,  and  no  inspector  shall  receive 
a  compensation  higher  than  $5  a  day  and  $3  additional  in 
lieu  of  subsistence,  and  no  deputy  collector,  clerk,  messenger, 
or  other  employe  shall  be  paid  at  a  rate  of  compensation 
higher  than  the  rate  now  being  paid  for  the  same  or  similar 
work  in  the  Internal  Revenue  Service. 

In  the  office  of  the  Commissioner  of  Internal  Revenue  at 
Washington,  District  of  Columbia,  there  shall  be  appointed 
by  the  Commissioner  of  Internal  Revenue,  with  the  approval 
of  the  Secretary  of  the  Treasury,  one  additional  deputy  com- 
missioner, at  a  salary  of  $4,000  per  annum ;  two  heads  of 
divisions,  whose  compensation  shall  not  exceed  $2,500  per 
annum ;  and  such  other  clerks,  messengers,  and  employes, 
and  to  rent  such  quarters  and  to  purchase  such  supplies  as 
may  be  necessary :  Provided,  That  for  a  period  of  two  years 
from  and  after  the  passage  of  this  Act  the  force  of  agents, 
deputy  collectors,  inspectors,  and  other  employes  not  in- 
cluding the  clerical  force  below  the  grade  of  chief  of  division 
employed  in  the  Bureau  of  Internal  Revenue  in  the  city  of 
Washington,  District  of  Columbia,  authorized  by  this  section 
of  this  Act  shall  be  appointed  by  the  Commissioner  of  In- 
ternal Revenue,  with  the  approval  of  the  Secretary  of  the 
Treasury,  under  such  rules  and  regulations  as  may  be  fixed 
by  the  Secretary  of  the  Treasury  to  insure  faithful  and  com- 
petent service,  and  with  such  compensation  as  the  Commis- 
sioner of  Internal  Revenue  may  fix,  with  the  approval  of  the 

(293) 


Compensa- 
tion of 
agents,  of- 
ficers,    etc., 
limited. 


Additional 
officers, 
clerks,    etc., 
in    office    of 
Commis- 
sioner   of 
Internal 
Revenue. 


Appoint- 
ment of 
agents,    offi- 
cers, etc. 


INCOME   TAXATION 


(Appdx. 


force. 


repealed. 


affected.  not 


cisecitaxeon 
corpora- 

j°arn  ^irit°<f 
Feb.  28.1913. 


of°spe£a? 

iawi8ap  ^ca- 
ble- 


Secretary  of  the  Treasury,  within  the  limitations  herein  pre- 
scr^e(^  :  Provided  further,  That  the  force  authorized  to  carry 
out  the  provisions  of  Section  II  of  this  Act,  when  not  em- 
ployed as  herein  provided,  shall  be  employed  on  general  in- 
ternal-revenue work. 

T.  That,  except  as  hereinafter  provided,  sections  one  to 
forty-two,  both  •  inclusive,  of  an  Act  entitled  "An  Act  to 
provide  revenue,  equalize  duties,  and  encourage  the  indus- 
tries of  the  United  States,  and  for  other  purposes,"  approv- 
ed August  fifth,  nineteen  hundred  and  nine,  and  all  Acts 
and  parts  of  Acts  inconsistent  with  the  provisions  of  this 
Act>  are  hereby  repealed:  Provided  *  *  *  that  all 
excise  taxes  upon  corporations  imposed  by  section  thirty- 
eight  [of  the  Act  of  August  5,  1909]  that  have  accrued  or 
have  been  imposed  for  the  year  ending  December  thirty- 
first,  nineteen  hundred  and  twelve,  shall  be  returned,  assess- 
ed, and  collected  in  the  same  manner,  and  under  the  same 
provisions,  liens,  and  penalties  as  if  section  thirty-eight 
continued  in  full  force  and  effect:  And  provided  further, 
that  a  special  excise  tax  with  respect  to  the  carrying  on  or 
doing  of  business,  equivalent  to  1  per  centum  upon  their 
entire  net  income,  shall  be  levied,  assessed,  and  collected 
upon  corporations,  joint  stock  companies  or  associations, 
and  insurance  companies,  of  the  character  described  in  sec- 
tion thirty-eight  of  the  Act  of  August  fifth,  nineteen  hun- 
dred and  nine,  for  the  period  from  January  first  to  February 
twenty-eighth,  nineteen  hundred  and  thirteen,  both  dates 
inclusive,  which  said  tax  shall  be  computed  upon  one-sixth 
of  the  entire  net  income  of  said  corporations,  joint  stock 
companies  or  associations,  and  insurance  companies,  for 
said  year,  said  net  income  to  be  ascertained  in  accordance 
with  the  provisions  of  subsection  G  of  section  two  of  this 
Act:  Pro™ded  further,  That  the  provisions  of  said  sec- 
^on  thirty-eight  of  the  Act  of  August  fifth,  nineteen  hun- 
dred  and  nine,  relative  to  the  collection  of  the  tax  therein 
(294) 


Appdx.) 


INCOME    TAX    LAW  OF    1913 


imposed  shall  remain  in  force  for  the  collection  of  the  ex- 
cise tax  herein  provided,  but  for  the  year  nineteen  hundred 
and  thirteen  it  shall  not  be  necessary  to  make  more  than 
one  return  and  assessment  for  all  the  taxes  imposed  herein 
upon  said  corporations,  joint  stock  companies  or  associa- 
tions, and  insurance  companies,  either  by  way  of  income  or 
excise,  which  return  and  assessment  shall  be  made  at  the 
times  and  in  the  manner  provided  in  this  Act ;  but  the  re- 
peal of  existing-  laws  or  modifications  thereof  embraced  in  Limitation 

,  .  .„  of    effect    of 

this  Act  shall  not  affect  any  act  done,  or  any  right  accruing-  repeal,  etc., 

*  °     of    existing 

or  accrued,  or  any  suit  or  proceeding  had  or  commenced  in  laws, 
any  civil  case  before  the  said  repeal  or  modification ;  but 
all  rights  and  liabilities  under  said  laws  shall  continue  and 
may  be  enforced  in  the  same  manner  as  if  said  repeal  or 
modifications  had  not  been  made.  Any  offenses  committed 
and  all  penalties  or  forfeitures  or  liabilities  incurred  prior 
to  the  passage  of  this  Act  under  any  statute  embraced  in  or 
changed,  modified,  or  repealed  by  this  Act  may  be  prose- 
cuted or  punished  in  the  same  manner  and  with  the  same 
effect  as  if  this  Act  had  not  been  passed.  No  Acts  of  linv 
itation  now  in  force,  whether  applicable  to  civil  causes  or 
to  the  prosecution  of  offenses  or  for  the  recovery  of  pen- 
alties or  forfeitures  embraced  in  or  modified,  changed,  or 
repealed  by  this  Act  shall  be  affected  thereby,  so  far  as 
they  affect  any  suits,  proceedings,  or  prosecutions,  whether 
civil  or  criminal,  for  causes  arising  or  acts  done  or  com- 
mitted prior  to  the  passage  of  this  Act,  which  may  be  com- 
menced and  prosecuted  within  the  same  time  and  with  the 
same  effect  as  if  this  Act  had  not  been  passed. 

(295) 


INCOME   TAXATION  (Appdx. 


UNITED  STATES  CORPORATION  EXCISE  TAX 
LAW  OF  1909 

Act  of  Congress,  August  5,  1909,  36  Stat.  112,  U.  S.  Comp. 

Stat.  Supp.  1909,  p.  844 

§  38.  "That  every  corporation,  joint  stock  company,  or 
association  organized  for  profit  and  having  a  capital  stock 
represented  by  shares,  and  every  insurance  company  now  or 
hereafter  organized  under  the  laws  of  the  United  States  or 
of  any  state  or  territory  of  the  United  States,  or  under  the 
acts  of  Congress  applicable  to  Alaska  or  the  District  of  Co- 
lumbia, or  now  or  hereafter  organized  under  the  laws  of  any 
foreign  country,  and  engaged  in  business  in  any  state  or  ter- 
ritory of  the  United  States  or  in  Alaska  or  in  the  District  of 
Columbia,  shall  be  subject  to  pay  annually  a  special  excise 
tax  with  respect  to  the  carrying  on  or  doing  business  by  such 
corporation,  joint  stock  company,  or  association,  or  insurance 
company,  equivalent  to  one  per  centum  upon  the  entire  net 
income  over  and  above  five  thousand  dollars,  received  by  it 
from  all  sources  during  such  year,  exclusive  of  amounts  re- 
ceived by  it  as  dividends  upon  stock  of  other  corporations, 
joint  stock  companies  or  associations,  or  insurance  companies 
subject  to  the  tax  hereby  imposed;  or,  if  organized  under 
the  laws  of  any  foreign  country,  upon  the  amount  of  net  in- 
come over  and  above  five  thousand  dollars  received  by  it  from 
business  transacted  and  capital  invested  within  the  United 
States  and  its  territories,  Alaska,  and  the  District  of  Columbia, 
during  such  year,  exclusive  of  amounts  so  received  by  it  as 
dividends  upon  stock  of  other  corporations,  joint  stock  com- 
panies or  associations  or  insurance  companies  subject  to  the 
tax  hereby  imposed:  Provided,  however,  that  nothing  in  this 
section  contained  shall  apply  to  labor,  agricultural  or  horti- 
cultural organizations,  or  to  fraternal  beneficiary  societies, 

(296) 


Appdx.)        CORPORATION   EXCISE   TAX   LAW   OF  1909 

orders,  or  associations  operating  under  the  lodge  system,  and 
providing  for  the  payment  of  life,  sick,  accident,  and  other 
benefits  to  the  members  of  such  societies,  orders  or  associa- 
tions, and  dependents  of  such  members,  nor  to  domestic  build- 
ing and  loan  associations,  organized  and  operated  exclusively 
for  the  mutual  benefit  of  their  members,  nor  to  any  corporation 
or  association  organized  and  operated  exclusively  for  religious, 
charitable  or  educational  purposes,  no  part  of  the  net  income 
of  which  inures  to  the  benefit  of  any  private  stockholder  or 
individual. 

Second.  Such  net  income  shall  be  ascertained  by  deducting 
from  the  gross  amount  of  the  income  of  such  corporation, 
joint  stock  company  or  association,  or  insurance  company, 
received  within  the  year  from  all  sources,  (first)  all  the  ordi- 
nary and  necessary  expenses  actually  paid  within  the  year  out 
of  income  in  the  maintenance  and  operation  of  its  business 
and  properties,  including  all  charges  such  as  rentals  or  fran- 
chise payments,  required  to  be  made  as  a  condition  to  the  con- 
tinued use  or  possession  of  property;  (second)  all  losses 
actually  sustained  within  the  year  and  not  compensated  by  in- 
surance or  otherwise,  including  a  reasonable  allowance  for  de- 
preciation of  property,  if  any,  and  in  the  case  of  insurance  com- 
panies the  sums  other  than  dividends,  paid  within  the  year  on 
policy  and  annuity  contracts  and  the  net  addition,  if  any,  re- 
quired by  law  to  be  made  within  the  year  to  reserve  funds ; 
(third)  interest  actually  paid  within  the  year  on  its  bonded 
or  other  indebtedness  to  an  amount  of  such  bonded  and  oth- 
er indebtedness  not  exceeding  the  paid-up  capital  stock  of 
such  corporation,  joint  stock  company  or  association,  or  in- 
surance company,  outstanding  at  the  close  of  the  year,  and  in 
the  case  of  a  bank,  banking  association,  or  trust  company,  all 
interest  actually  paid  by  it  within  the  year  on  deposits;  (fourth) 
all  sums  paid  by  it  within  the  year  for  taxes  imposed  under 
the  authority  of  the  United  States  or  of  any  state  or  territory 
thereof,  or  imposed  by  the  government  of  any  foreign  country 

(297) 


INCOME    TAXATION  (Appdx. 

as  a  condition  to  carry  on  business  therein ;  (fifth)  all  amounts 
received  by  it  within  the  year  as  dividends  upon  stock  of  other 
corporations,  joint  stock  companies  or  associations,  or  insur- 
ance companies,  subject  to  the  tax  hereby  imposed :  Provided, 
that  in  the  case  of  a  corporation,  joint  stock  company  or  as- 
sociation, or  insurance  company,  organized  under  the  laws  of 
a  foreign  country,  such  net  income  shall  be  ascertained  by  de- 
ducting from  the  gross  amount  of  its  income  received  within 
the  year  from  business  transacted  and  capital  invested  within 
the  United  States  and  any  of  its  territories,  Alaska,  and  the 
District  of  Columbia,  (first)  all  the  ordinary  and  necessary  ex- 
penses actually  paid  within  the  year  out  of  earnings  in  the 
maintenance  and  operation  of  its  business  and  property  within 
the  United  States  and  its  territories,  Alaska,  and  the  District 
of  Columbia,  including  all  charges  such  as  rentals  or  franchise 
payments  required  to  be  made  as  a  condition  to  the  continued 
use  or  possession  of  property;  (second)  all  losses  actually 
sustained  within  the  year  in  business  conducted  by  it  within 
the  United  States  or  its  territories,  Alaska,  or  the  District  of 
Columbia  not  compensated  by  insurance  or  otherwise,  includ- 
ing a  reasonable  allowance  for  depreciation  of  property,  if 
any,  and  in  the  case  of  insurance  companies  the  sums  other 
than  dividends,  paid  within  the  year  on  policy  and  annuity 
contracts  and  the  net  addition,  if  any,  required  by  law  to  be 
made  within  the  year  to  reserve  funds ;  (third)  interest  actually 
paid  within  the  year  on  its  bonded  or  other  indebtedness  to  an 
amount  of  such  bonded  and  other  indebtedness,  not  exceeding 
the  proportion  of  its  paid-up  capital  stock  outstanding  at  the 
close  of  the  year  which  the  gross  amount  of  its  income  for 
the  year  from  business  transacted  and  capital  invested  within 
the  United  States  and  any  of  its  territories,  Alaska,  and  the 
District  of  Columbia  bears  to  the  gross  amount  of  its  income 
derived  from  all  sources  within  and  without  the  United  States ; 
(fourth)  the  sums  paid  by  it  within  the  year  for  taxes  im- 
posed under  the  authority  of  the  United  States  or  of  any  state 

(298) 


Appdx.)        CORPOBATION   EXCISE   TAX  LAW   OF  1909 

or  territory  thereof;  (fifth)  all  amounts  received  by  it  within 
the  year  as  dividends  upon  stock  of  other  corporations,  joint 
stock  companies  or  associations,  and  insurance  companies,  sub- 
ject to  the  tax  hereby  imposed.  In  the  case  of  assessment  in- 
surance companies  the  actual  deposit  of  sums  with  state  or 
territorial  officers,  pursuant  to  law,  as  additions  to  guaranty 
or  reserve  funds  shall  be  treated  as  being  payments  required 
by  law  to  reserve  funds. 

Third.  There  shall  be  deducted  from  the  amount  of  the 
net  income  of  each  of  such  corporations,  joint  stock  compa- 
nies or  associations,  or  insurance  companies,  ascertained  as 
provided  in  the  foregoing  paragraphs  of  this  section,  the  sum 
of  five  thousand  dollars,  and  said  tax  shall  be  computed  upon 
the  remainder  of  said  net  income  of  such  corporation,  joint 
stock  company  or  association,  or  insurance  company,  for  the 
year  ending  December  thirty-first,  nineteen  hundred  and  nine, 
and  for  each  calendar  year  thereafter ;  and  on  or  before  the 
first  day  of  March,  nineteen  hundred  and  ten,  and  the  first 
day  of  March  in  each  year  thereafter,  a  true  and  accurate  re- 
turn under  oath  or  affirmation  of  its  president,  vice-president, 
or  other  principal  officer,  and  its  treasurer  or  assistant  treas- 
urer, shall  be  made  by  each  of  the  corporations,  joint  stock 
companies  or  associations,  and  insurance  companies,  subject 
to  the  tax  imposed  by  this  section,  to  the  collector  of  internal 
revenue  for  the  district  in  which  such  corporation,  joint  stock 
company  or  association,  or  insurance  company  has  its  prin- 
cipal place  of  business,  or,  in  the  case  of  a  corporation,  joint 
stock  company  or  association,  or  insurance  company,  organized 
under  the  laws  of  a  foreign  country,  in  the  place  where  its 
principal  business  is  carried  on  within  the  United  States,  in 
such  form  as  the  Commissioner  of  Internal  Revenue,  with  the 
approval  of  the  Secretary  of  the  Treasury,  shall  prescribe, 
setting  forth  (first)  the  total  amount  of  the  paid-up  capital 
stock  of  such  corporation,  joint  stock  company  or  association, 
or  insurance  company,  outstanding  at  the  close  of  the  year; 

(299) 


INCOME   TAXATION  (Appdx. 

(second)  the  total  amount  of  the  bonded  and  other  indebted- 
ness of  such  corporation,  joint  stock  company  or  association, 
or  insurance  company  at  the  close  of  the  year;  (third)  the 
gross  amount  of  the  income  of  such  corporation,  joint  stock 
company  or  association,  or  insurance  company,  received  dur- 
ing such  year  from  all  sources,  and  if  organized  under  the 
laws  of  a  foreign  country  the  gross  amount  of  its  income  re- 
ceived within  the  year  from  business  transacted  and  capital 
invested  within  the  United  States  and  any  of  its  territories, 
Alaska,  and  the  District  of  Columbia;  also  the  amount  re- 
ceived by  such  corporation,  joint  stock  company  or  associa- 
tion, or  insurance  company  within  the  year  by  way  of  divi- 
dends upon  stock  of  other  corporations,  joint  stock  companies 
or  associations,  or  insurance  companies,  subject  to  the  tax  im- 
posed by  this  section;  (fourth)  the  total  amount  of  all  the 
ordinary  and  necessary  expenses  actually  paid  out  of  earnings 
in  the  maintenance  and  operation  of  the  business  and  proper- 
ties of  such  corporation,  joint  stock  company  or  association, 
or  insurance  company  within  the  year,  stating  separately  all 
charges  such  as  rentals  or  franchise  payments  required  to  be 
made  as  a  condition  to  the  continued  use  or  possession  of  prop- 
erty, and  if  organized  under  the  laws  of  a  foreign  country  the 
amount  so  paid  in  the  maintenance  and  operation  of  its  busi- 
ness within  the  United  States  and  its  territories,  Alaska,  and 
the  District  of  Columbia ;  (fifth)  the  total  amount  of  all  losses 
actually  sustained  during  the  year  and  not  compensated  by  in- 
surance or  otherwise,  stating  separately  any  amounts  allowed 
for  depreciation  of  property,  and  in  the  case  of  insurance 
companies  the  sums  other  than  dividends  paid  within  the  year 
on  policy  and  annuity  contracts  and  the  net  addition,  if  any, 
required  by  law  to  be  made  within  the  year  to  reserve  funds ; 
and  in  the  case  of  a  corporation,  joint  stock  company  or  as- 
sociation, or  insurance  company,  organized  under  the  laws  of 
a  foreign  country,  all  losses  actually  sustained  by  it  during 
the  year  in  business  conducted  by  it  within  the  United  States 

(300) 


Appdx.)        CORPORATION    EXCISE   TAX   LAW   OF   1909 

or  its  territories,  Alaska,  and  the  District  of  Columbia,  not 
compensated  by  insurance  or  otherwise,  stating  separately  any 
amounts  allowed  for  depreciation  of  property,  and  in  the  case 
of  insurance  companies  the  sums  other  than  dividends  paid 
within  the  year  on  policy  and  annuity  contracts  and  the  net 
addition,  if  any,  required  by  law  to  be  made  within  the  year 
to  reserve  fund;  (sixth)  the  amount  of  interest  actually  paid 
within  the  year  on  its  bonded  or  other  indebtedness  to  an 
amount  of  such  bonded  and  other  indebtedness  not  exceeding 
the  paid-up  capital  stock  of  such  corporation,  joint  stock  com- 
pany or  association,  or  insurance  company,  outstanding  at  the 
close  of  the  year,  and  in  the  case  of  a  bank,  banking  associa- 
tion, or  trust  company,  stating  separately  all  interest  paid  by 
it  within  the  year  on  deposits ;  or  in  case  of  a  corporation, 
joint  stock  company  or  association,  or  insurance  company,  or- 
ganized under  the  laws  of  a  foreign  country,  interest  so  paid 
on  its  bonded  or  other  indebtedness  to  an  amount  of  such 
bonded  and  other  indebtedness  not  exceeding  the  proportion 
of  its  paid-up  capital  stock  outstanding  at  the  close  of  the 
year,  which  the  gross  amount  of  its  income  for  the  year  from 
business  transacted  and  capital  invested  within  the  United 
States  and  any  of  its  territories,  Alaska,  and  the  District  of 
Columbia,  bears  to  the  gross  amount  of  its  income  derived 
from  all  sources  within  and  without  the  United  States ; 
(seventh)  the  amount  paid  by  it  within  the  year  for  taxes 
imposed  under  the  authority  of  the  United  States  or  any 
state  or  territory  thereof,  and  separately  the  amount  so 
paid  by  it  for  taxes  imposed  by  the  government  of  any  for- 
eign country  as  a  condition  to  carrying  on  business  there- 
in; (eighth)  the  net  income  of  such  corporation,  joint  stock 
company  or  association,  or  insurance  company,  after  mak- 
ing the  deductions  in  this  section  authorized.  All  such  re- 
turns shall  as  received  be  transmitted  forthwith  by  the  col- 
lector to  the  Commissioner  of  Internal  Revenue. 

Fourth.     Whenever  evidence  shall  be  produced  before  the 

(301) 


INCOME   TAXATION  (Appdx. 

Commissioner  of  Internal  Revenue  which  in  the  opinion  of 
the  Commissioner  justifies  the  belief  that  the  return  made  by 
any  corporation,  joint  stock  company  or  association,  or  in- 
surance company  is  incorrect,  or  whenever  any  collector  shall 
report  to  the  Commissioner  of  Internal  Revenue  that  any  cor- 
poration, joint  stock  company  or  association,  or  insurance  com- 
pany has  failed  to  make  a  return  as  required  by  law,  the  Com- 
missioner of  Internal  Revenue  may  require  from  the  corpora- 
tion, joint  stock  company  or  association,  or  insurance  compa- 
ny making  such  return,  such  further  information  with  refer- 
ence to  its  capital,  income,  losses,  and  expenditures  as  he 
may  deem  expedient ;  and  the  Commissioner  of  Internal  Rev- 
enue, for  the  purpose  of  ascertaining  the  correctness  of  such 
return  or  for  the  purpose  of  making  a  return  where  none  has 
been  made,  is  hereby  authorized,  by  any  regularly  appointed 
revenue  agent  specially  designated  by  him  for  that  purpose, 
to  examine  any  books  and  papers  bearing  upon  the  matters  re- 
quired to  be  included  in  the  return  of  such  corporation,  joint 
stock  company  or  association,  or  insurance  company,  and  to 
require  the  attendance  of  any  officer  or  employee  of  such  cor- 
poration, joint  stock  company  or  association,  or  insurance 
company,  and  to  take  his  testimony  with  reference  to  the  mat- 
ter required  by  law  to  be  included  in  such  return,  with  power 
to  administer  oaths  to  such  person  or  persons ;  and  the  Com- 
missioner of  Internal  Revenue  may  also  invoke  the  aid  of  any 
court  of  the  United  States  having  jurisdiction  to  require  the 
attendance  of  such  officers  or  employees  and  the  production 
of  such  books  and  papers.  Upon  the  information  so  acquired 
the  Commissioner  of  Internal  Revenue  may  amend  any  re- 
turn or  make  a  return  where  none  has  been  made.  All  pro- 
ceedings taken  by  the  Commissioner  of  Internal  Revenue 
under  the  provisions  of  this  section  shall  be  subject  to  the 
approval  of  the  Secretary  of  the  Treasury. 

Fifth.     All  returns  shall  be  retained  by  the  Commissioner 
of  Internal  Revenue,  who  shall  make  assessments  thereon; 

(302) 


Appdx.)        CORPORATION   EXCISE   TAX   LAW   OF  1909 

and  in  case  of  any  return  made  with  false  or  fraudulent  in- 
tent, he  shall  add  one  hundred  per  centum  of  such  tax,  and 
in  case  of  a  refusal  or  neglect  to  make  a  return  or  to  verify 
the  same  as  aforesaid  he  shall  add  fifty  per  centum  of  such 
tax.  In  case  of  neglect  occasioned  by  the  sickness  or  absence 
of  an  officer  of  such  corporation,  joint  stock  company  or  as- 
sociation, or  insurance  company,  required  to  make  said  re- 
turn, or  for  other  sufficient  reason,  the  collector  may  allow 
such  further  time  for  making  and  delivering  such  return  as 
he  may  deem  necessary,  not  exceeding  thirty  days.  The 
amount  so  added  to  the  tax  shall  be  collected  at  the  same  time 
and  in  the  same  manner  as  the  tax  originally  assessed,  unless 
the  refusal,  neglect,  or  falsity  is  discovered  after  the  date 
for  payment  of  said  taxes,  in  which  case  the  amount  so  added 
shall  be  paid  by  the  delinquent  corporation,  joint  stock  com- 
pany or  association,  or  insurance  company,  immediately  upon 
notice  given  by  the  collector.  All  assessments  shall  be  made 
and  the  several  corporations,  joint  stock  companies  or  associa- 
tions, or  insurance  companies,  shall  be  notified  of  the  amount 
for  which  they  are  respectively  liable  on  or  before  the  first 
day  of  June  of  each  successive  year,  and  said  assessments 
shall  be  paid  on  or  before  the  thirtieth  day  of  June,  except  in 
cases  of  refusal  or  neglect  to  make  such  return,  and  in  cases 
of  false  or  fraudulent  returns,  in  which  cases  the  Commis- 
sioner of  Internal  Revenue  shall,  upon  the  discovery  thereof, 
at  any  time  within  three  years  after  said  return  is  due,  make 
a  return  upon  information  obtained  as  above  provided  for, 
and  the  assessment  made  by  the  Commissioner  of  Internal 
Revenue  thereon  shall  be  paid  by  such  corporation,  joint  stock 
company  or  association,  or  insurance  company  immediately 
upon  notification  of  the  amount  of  such  assessment;  and  to 
any  sum  or  sums  due  and  unpaid  after  the  thirtieth  day  of 
June  in  any  year,  and  for  ten  days  after  notice  and  demand 
thereof  by  the  collector,  there  shall  be  added  the  sum  of  five 
per  centum  on  the  amount  of  tax  unpaid  and  interest  at  the 

(303) 


INCOME   TAXATION  (Appdx. 

rate  of  one  per  centum  per  month  upon  said  tax  from  the  time 
the  same  becomes  due. 

[NOTE.  This  subdivision  of  the  section  was  amended  by 
Act  of  Congress,  March  3,  1913,  by  providing  as  follows: 
"Any  corporation,  joint  stock  company,  association,  or  any 
insurance  company  subject  to  the  special  excise  tax  provided 
by  section  thirty-eight  of  the  act  of  August  fifth,  nineteen 
hundred  and  nine,  known  as  the  special  excise  corporation-tax 
law,  which  has  been  or  may  be  compelled  to  pay  or  become 
liable  for  any  additional  tax  within  the  provisions  of  subsec- 
tion five  of  said  section  thirty-eight,  which  additional  tax  has 
been  or  may  hereafter  be  imposed  for  a  neglect  to  file  a  re- 
turn as  provided  in  said  corporation-tax  law  on  or  before  the 
first  of  March  of  any  year,  may,  within  one  year  after  the 
passage  of  this  act,  or  within  one  year  after  the  date  of  notice 
of  assessment  where  such  notice  is  given  after  the  passage  of 
this  act,  make  application  to  the  Commissioner  of  Internal 
Revenue  for  a  refund  of  such  additional  tax.  And  the  Com- 
missioner of  Internal  Revenue,  with  the  advice  and  consent 
of  the  Solicitor  of  Internal  Revenue,  is  hereby  directed  to  re- 
mit, abate,  or  pay  back  all  such  additional  taxes  in  excess  of 
$100  for  any  single  year  whenever  in  any  case  it  appears  to 
his  satisfaction  that  the  additional  tax  was  assessed  or  im- 
posed solely  because  of  a  neglect  to  make  a  return  at  the  time 
or  times  specified  in  said  act,  and  without  any  intention  or 
design  on  the  part  of  any  officer  of  such  corporation,  joint- 
stock  company,  association,  or  insurance  company  to  hinder 
or  delay  the  United  States  in  the  collection  of  the  tax  original- 
ly assessed."] 

Sixth.  When  the  assessment  shall  be  made,  as  provided  in 
this  section,  the  returns,  together  with  any  corrections  there- 
of which  may  have  been  made  by  the  commissioner,  shall  be 
filed  in  the  office  of  the  Commissioner  of  Internal  Revenue, 
and  shall  constitute  public  records  and  be  open  to  public  in- 
spection as  such. 

(304) 


Appdx.)        CORPORATION   EXCISE  TAX  LAW  OP   1909 

[NOTE.  This  subdivision  of  the  section  was  amended  by 
Act  of  Congress  of  June  17,  1910,  Stat.  at  L,  2d  Sess.  61st 
Cong.  494,  chap.  297,  by  adding  the  following  words  "That 
any  and  all  such  returns  shall  be  open  to  inspection  only  upon 
the  order  of  the  President,  under  rules  and  regulations  to  be 
prescribed  by  the  Secretary  of  the  Treasury  and  approved  by 
the  President."] 

Seventh.  It  shall  be  unlawful  for  any  collector,  deputy 
collector,  agent,  clerk,  or  other  officer  or  employee  of  the 
United  States  to  divulge  or  make  known  in  any  manner  what- 
ever not  provided  by  law  to  any  person  any  information  ob- 
tained by  him  in  the  discharge  of  his  official  duty,  or  to  divulge 
or  make  known  in  any  manner  not  provided  by  law  any  docu- 
ment received,  evidence  taken,  or  report  made  under  this  sec- 
tion except  upon  the  special  direction  of  the  President;  and 
any  offense  against  the  foregoing  provision  shall  be  a  mis- 
demeanor and  be  punished  by  a  fine  not  exceeding  one  thou- 
sand dollars,  or  by  imprisonment  not  exceeding  one  year,  or 
both,  at  the  discretion  of  the  court. 

Eighth.  If  any  of  the  corporations,  joint  stock  companies 
or  associations,  or  insurance  companies  aforesaid,  shall  re- 
fuse or  neglect  to  make  a  return  at  the  time  or  times  herein- 
before specified  in  each  year,  or  shall  render  a  false  or  fraudu- 
lent return,  such  corporation,  joint  stock  company  or  associa- 
tion, or  insurance  company  shall  be  liable  to  a  penalty  of  not 
less  than  one  thousand  dollars  and  not  exceeding  ten -thousand 
dollars. 

Any  person  authorized  by  law  to  make,  render,  sign,  or 
verify  any  return,  who  makes  any  false  or  fraudulent  return, 
or  statement,  with  intent  to  defeat  or  evade  the  assessment 
required  by  this  section  to  be  made,  shall  be  guilty  of  a  mis- 
demeanor, and  shall  be  fined  not  exceeding  one  thousand  dol- 
lars or  be  imprisoned  not  exceeding  one  year,  or  both,  at  the 
discretion  of  the  court,  with  the  costs  of  prosecution. 

All  laws  relating  to  the  collection,  remission,  and  refund 
BL.INC.TAX.— 20  (305) 


INCOME   TAXATION  (Appdx. 

of  internal-revenue  taxes,  so  far  as  applicable  to  and  not  in- 
consistent with  the  provisions  of  this  section,  are  hereby  ex- 
tended and  made  applicable  to  the  tax  imposed  by  this  section. 
Jurisdiction  is  hereby  conferred  upon  the  circuit  and  dis- 
trict courts  of  the  United  States  for  the  district  within  which 
any  person  summoned  under  this  section  to  appear  to  testify 
or  to  produce  books  as  aforesaid,  shall  reside,  to  compel  such 
attendance,  production  of  books,  and  testimony  by  appropri- 
ate process. 

FEDERAL  INCOME  TAX  LAW  OF  1894 

Act  of  Congress,  August  27,  1894,  28  Stat.  509,  c.  349 

Section  27.  That  from  and  after  the  first  day  of  Janu- 
ary, eighteen  hundred  and  ninety-five,  and  until  the  first  day 
of  January,  nineteen  hundred,  there  shall  be  assessed,  lev- 
ied, collected  and  paid  annually  upon  the  gains,  profits,  and 
income  received  in  the  preceding  calendar  year  by  every 
citizen  of  the  United  States,  whether  residing  at  home  or 
abroad,  and  every  person  residing  therein,  whether  said 
gains,  profits,  or  income  be  derived  from  any  kind  of  prop- 
erty, rents,  interest,  dividends,  or  salaries,  or  from  any  pro- 
fession, trade,  employment,  or  vocation  carried  on  in  the 
United  States  or  elsewhere,  or  from  any  other  source  what- 
ever, a  tax  of  two  per  centum  on  the  amount  so  derived 
over  and  above  four  thousand  dollars,  and  a  like  tax  shall 
be  levied,  collected,  and  paid  annually  upon  the  gains,  prof- 
its, and  income  from  all  property  owned  and  of  every  busi- 
ness, trade,  or  profession  carried  on  in  the  United  States  by 
persons  residing  without  the  United  States.  And  the  tax 
herein  provided  for  shall  be  assessed  by  the  Commissioner 
of  Internal  Revenue,  and  collected  and  paid,  upon  the  gains, 
profits,  and  income  for  the  year  ending  the  thirty-first  day 
of  December  next  preceding  the  time  for  levying,  collecting, 
and  paying  said  tax. 
(306) 


Appdx.)  INCOME  TAX  LAW  OF    1894 

Section  28.  That  in  estimating  the  gains,  profits,,  and 
income  of  any  person  there  shall  be  included  all  income  de- 
rived from  interest  upon  notes,  bonds,  and  other  securities, 
except  such  bonds  of  the  United  States  the  principal  and 
interest  of  which  are  by  the  law  of  their  issuance  exempt 
from  all  federal  taxation;  profits  realized  within  the  year 
from  sales  of  real  estate  purchased  within  two  years  pre- 
vious to  the  close  of  the  year  for  which  income  is  estimated ; 
interest  received  or  accrued  upon  all  notes,  bonds,  mort- 
gages, and  other  forms  of  indebtedness  bearing  interest, 
whether  paid  or  not,  if  good  and  collectible,  less  the  interest 
which  has  become  due  from  said  person  or  which  has  been 
paid  by  him  during  the  year;  the  amount  of  all  premium 
on  all  bonds,  notes,  or  coupons ;  the  amount  of  sales  of 
live  stock,  sugar,  cotton,  wool,  butter,  cheese,  pork,  beef, 
mutton,  or  other  meats,  hay',  and  grain,  or  other  vegetable 
or  other  productions,  being  the  growth  or  produce  of  the 
estate  of  such  person,  less  the  amount  expended  in  the  pur- 
chase or  production  of  said  stock  or  produce,  and  not  in- 
cluding any  part  thereof  consumed  directly  by  the  family; 
money  and  the  value  of  all  personal  property  acquired  by 
gift  or  inheritance;  all  other  gains,  profits,  and  income  de- 
rived from  any  source  whatever,  except  that  portion  of  the 
salary,  compensation  or  pay  received  for  services  in  the 
civil,  military,  naval,  or  other  service  of  the  United  States, 
including  senators,  representatives,  and  delegates  in  Con- 
gress, from  which  the  tax  has  been  deducted,  and  except 
that  portion  of  any  salary  upon  which  the  employer  is  re- 
quired by  law  to  withhold,  and  does  withhold,  the  tax  and 
pays  the  same  to  the  officer  authorized  to  receive  it.  In 
computing  incomes  the  necessary  expenses  actually  in- 
curred in  carrying  on  any  business,  occupation,  or  profession 
shall  be  deducted  and  also  all  interest  due  or  paid  within 
the  year  by  such  person  on  existing  indebtedness.  And  all 
national,  state,  county,  school,  and  municipal  taxes,  not  in- 

(307) 


INCOME   TAXATION  (Appdx. 

eluding  those  assessed  against  local  benefits,  paid  within 
the  year  shall  be  deducted  from  the  gains,  profits,  or  income 
of  the  person  who  has  actually  paid  the  same,  whether  such 
person  be  owner,  tenant,  or  mortgagor;  also  losses  actual- 
ly sustained  during  the  year,  incurred  in  trade  or  arising 
from  fires,  storms,  or  shipwreck,  and  not  compensated  for 
by  insurance  or  otherwise,  and  debts  ascertained  to  be 
worthless,  but  excluding  all  estimated  depreciation  of  values 
and  losses  within  the  year  on  sales  of  real  estate  purchased 
within  two  years  previous  to  the  year  for  which  income  is 
estimated:  Provided,  that  no  deduction  shall  be  made  for 
any  amount  paid  out  for  new  buildings,  permanent  improve- 
ments, or  betterments,  made  to  increase  the  value  of  any 
property  or  estate :  Provided,  further,  that  only  one  de- 
duction of  four  thousand  dollars  shall  be  made  from  the  ag- 
gregate income  of  all  the  members  of  any  family,  composed 
of  one  or  both  parents,  and  one  or  more  minor  children,  or 
husband  and  wife ;  that  guardians  shall  be  allowed  to  make 
a  deduction  in  favor  of  each  and  every  ward,  except  that 
in  case  where  two  or  more  wards  are  comprised  in  one 
family,  and  have  joint  property  interests,  the  aggregate  de- 
duction in  their  favor  shall  not  exceed  four  thousand  dol- 
lars :  and  provided  further,  that  in  case  where  the  salary  or 
other  compensation  paid  to  any  person  in  the  employment 
or  service  of  the  United  States  shall  not  exceed  the  rate  of 
four  thousand  dollars  per  annum,  or  shall  be  by  fees,  or  un- 
certain or  irregular  in  the  amount  or  in  the  time  during 
which  the  same  shall  have  accrued  or  been  earned,  such 
salary  or  other  compensation  shall  be  included  in  estimating 
the  annual  gains,  profits,  or  income  of  the  person  to  whom 
the  same  shall  have  been  paid,  and  shall  include  that  por- 
tion of  any  income  or  salary  upon  which  a  tax  has  not  been 
paid  by  the  employer,  where  the  employer  is  required  by  law 
to  pay  on  the  excess  over  four  thousand  dollars:  Provided 
also,  that  in  computing  the  income  of  any  person,  corpora- 

(308) 


Appdx.)  INCOME   TAX   LAW   OF    1894 

tion,  company,  or  association,  there  shall  not  be  included  the 
amount  received  from  any  corporation,  company,  or  asso- 
ciation as  dividends  upon  the  stock  of  such  corporation, 
company,  or  association,  if  the  tax  of  two  per  centum  has 
been  paid  upon  its  net  profits  by  said  corporation,  com- 
pany, or  association  as  required  by  this  act. 

Section  29.  That  it  shall  be  the  duty  of  all  persons  of 
lawful  age  having  an  income  of  more  than  three  thousand 
five  hundred  dollars  for  the  taxable  year,  computed  on  the 
basis  herein  prescribed,  to  make  and  render  a  list  or  return, 
on  or  before  the  day  provided  by  law,  in  such  form  and  man- 
ner as  may  be  directed  by  the  Commissioner  of  Internal 
Revenue,  with  the  approval  of  the  Secretary  of  the  Treas- 
ury, to  the  collector  or  a  deputy  collector  of  the  district  in 
which  they  reside,  of  the  amount  of  their  income,  gains,  and 
profits,  as  aforesaid ;  and  all  guardians  and  trustees,  exec- 
utors, administrators,  agents,  receivers,  and  all  persons  or 
corporations  acting  in  any  fiduciary  capacity  shall  make  and 
render  a  list  or  return,  as  aforesaid,  to  the  collector  or  a 
deputy  collector  of  the  district  in  which  such  person  or  cor- 
poration acting  in  a  fiduciary  capacity  resides  or  does  busi- 
ness, of  the  amount  of  income,  gains,  and  profits  of  any 
minor  or  person  for  whom  they  act,  but  persons  having  less 
than  three  thousand  five  hundred  dollars  income  are  not  re- 
quired to  make  such  report;  and  the  collector  or  deputy  col- 
lector shall  require  every  list  or  return  to  be  verified  by  the 
oath  or  affirmation  of  the  party  rendering  it,  and  may  increase 
the  amount  of  any  list  or  return  if  he  has  reason  to  believe  that 
the  same  is  understated ;  and  in  case  any  such  person  having  a 
taxable  income  shall  neglect  or  refuse  to  make  and  render  such 
list  and  return,  or  shall  render  a  wilfully  false  or  fraudulent 
list  or  return,  it  shall  be  the  duty  of  the  collector  or  deputy 
collector  to  make  such  list  according  to  the  best  information 
he  can  obtain,  by  the  examination  of  such  person,  or  any 
other  evidence,  and  to  add  fifty  per  centum  as  a  penalty  to 

(309) 


INCOME   TAXATION  (Appdx. 

the  amount  of  the  tax  due  on  such  list  in  all  cases  of  wilfull 
neglect  or  refusal  to  make  and  render  a  list  or  return ;  and 
in  all  cases  of  a  wilfully  false  or  fraudulent  list  or  return 
having  been  rendered  to  add  one  hundred  per  centum  as  a 
penalty  to  the  amount  of  tax  ascertained  to  be  due,  the  tax 
and  the  additions  thereto  as  a  penalty  to  be  assessed  and 
collected  in  the  manner  provided  for  in  other  cases  of  will- 
ful neglect  or  refusal  to  render  a  list  or  return,  or  of  render- 
ing a  false  or  fraudulent  return.  Provided,  that  any  person 
or  corporation  in  his,  her,  or  its  own  behalf,  or  as  such  fidu- 
ciary, shall  be  permitted  to  declare,  under  oath  or  affirma- 
tion, the  form  and  manner  of  which  shall  be  prescribed  by 
the  Commissioner  of  Internal  Revenue,  with  the  approval 
of  the  Secretary  of  the  Treasury,  that  he,  she,  or  his  or 
her,  or  its  ward  or  beneficiary,  was  not  possessed  of  an  in- 
come of  four  thousand  dollars,  liable  to  be  assessed  accord- 
ing to  the  provisions  of  this  act;  or  may  declare  that  he, 
she,  or  it,  or  his,  her,  or  its  ward  or  beneficiary  has  been 
assessed  and  has  paid  an  income  tax  elsewhere  in  the  same 
year,  under  authority  of  the  United  States,  upon  all  his,  her, 
or  its  income,  gains,  or  profits,  and  upon  all  the  income, 
gains,  or  profits  for  which  he,  she,  or  it  is  liable  as  such 
fiduciary,  as  prescribed  by  law ;  and  if  the  collector  or  dep- 
uty collector  shall  be  satisfied  of  the  truth  of  the  declara- 
tion, such  person  or  corporation  shall  thereupon  be  exempt 
from  income  tax  in  the  said  district  for  that  year ;  or  if  the 
list  or  return  of  any  person  or  corporation,  company,  or  as- 
sociation shall  have  been  increased  by  the  collector  or  dep- 
uty collector,  such  person  or  corporation,  company,  or  as- 
sociation may  be  permitted  to  prove  the  amount  of  income 
liable  to  be  assessed;  but  such  proof  shall  not  be  consid- 
ered conclusive  of  the  facts,  and  no  deductions  claimed  in 
such  cases  shall  be  made  or  allowed  until  approved  by  the 
collector  or  deputy  collector.  Any  person  or  company,  cor- 
poration, or  association  feeling  aggrieved  by  the  decision 

(310) 


Appdx.)  INCOME  TAX  LAW  OF    1894 

of  the  deputy  collector,  in  such  cases,  may  appeal  to  the  col- 
lector of  the  district,  and  his  decision  thereon,  unless  revers- 
ed by  the  Commissioner  of  Internal  Revenue,  shall  be  final. 
If  dissatisfied  with  the  decision  of  the  collector,  such  person 
or  corporation,  company,  or  association  may  submit  the 
case,  with  all  the  papers,  to  the  Commissioner  of  Internal 
Revenue  for  his  decision,  and  may  furnish  the  testimony  of 
witnesses  to  prove  any  relevant  facts,  having  served  notice 
to  that  effect  upon  the  Commissioner  of  Internal  Revenue, 
as  herein  prescribed. 

Such  notice  shall  state  the  time  and  place  at  which,  and 
the  officer  before  whom,  the  testimony  will  be  taken;  the 
name,  age,  residence,  and  business  of  the  proposed  witness, 
with  the  questions  to  be  propounded  to  the  witness,  or  a 
brief  statement  of  the  substance  of  the  testimony  he  is  ex- 
pected to  give :  Provided,  that  the  Government  may  at  the 
same  time  and  place  take  testimony  upon  like  notice  to  re- 
but the  testimony  of  the  witnesses  examined  by  the  person 
taxed. 

The  notice  shall  be  delivered  or  mailed  to  the  Commis- 
sioner of  Internal  Revenue  a  sufficient  number  of  days  pre- 
vious to  the  day  fixed  for  taking  the  testimony,  to  allow 
him,  after  its  receipt,  at  least  five  days,  exclusive  of  the 
period  required  for  mail  communication  with  the  place  at 
which  the  testimony  is  to  be  taken,  in  which  to  give,  should 
he  so  desire,  instructions  as  to  the  cross-examination  of  the 
proposed  witness. 

Whenever  practicable,  the  affidavit  or  deposition  shall 
be  taken  before  a  collector  or  deputy  collector  of  internal 
revenue,  in  which  case  reasonable  notice  shall  be  given  to 
the  collector  or  deputy  collector  of  the  time  fixed  for  tak- 
ing the  deposition  or  affidavit:  Provided  further,  that  no 
penalty  shall  be  assessed  upon  any  person  or  corporation, 
company,  or  association  for  such  neglect  or  refusal  or  for 
making  or  rendering  a  willfully  false  or  fraudulent  return, 

(311) 


INCOME   TAXATION  (Appdx. 

except  after  reasonable  notice  of  the  time  and  place  of  hear- 
ing, to  be  prescribed  by  the  Commissioner  of  Internal  Rev- 
enue, so  as  to  give  the  person  charged  an  opportunity  to 
be  heard. 

Section  30.  The  taxes  on  incomes  herein  imposed  shall 
be  due  and  payable  on  or  before  the  first  day  of  July  in 
each  year;  and  to  any  sum  or  sums  annually  due  and  un- 
paid after  the  first  day  of  July  as  aforesaid,  and  for  ten  days 
after  notice  and  demand  thereof  by  the  collector,  there 
shall  be  levied,  in  addition  thereto,  the  sum  of  five  per 
centum  on  the  amount  of  taxes  unpaid,  and  interest  at  the 
rate  of  one  per  centum  per  month  upon  said  tax  from  the 
time  the  same  becomes  due,  as  a  penalty,  except  from  the 
estates  of  deceased,  insane,  or  insolvent  persons. 

Section  31.  Any  non-resident  may  receive  the  benefit  of 
the  exemptions  hereinbefore  provided  for  by  filing  with  the 
deputy  collector  of  any  district  a  true  list  of  all  his  property 
and  sources  of  income  in  the  United  States  and  complying 
with  the  provisions  of  section  twenty-nine  of  this  act  as  if 
a  resident.  In  computing  income,  he  shall  include  all  in- 
come from  every  source,  but  unless  he  be  a  citizen  of  the 
United  States,  he  shall  only  pay  on  that  part  of  the  income 
which  is  derived  from  any  source  in  the  United  States.  In 
case  such  non-resident  fails  to  file  such  statement,  the  col- 
lector of  each  district  shall  collect  the  tax  on  the  income  de- 
rived from  property  situate  in  his  district,  subject  to  in- 
come tax,  making  no  allowance  for  exemptions,  and  all 
property  belonging  to  such  non-resident  shall  be  liable  to 
distraint  for  tax:  Provided,  that  non-resident  corporations 
shall  be  subject  to  the  same  laws  as  to  tax  as  resident  cor- 
porations, and  the  collection  of  the  tax  shall  be  made  in  the 
same  manner  as  provided  for  collections  of  taxes  against 
non-resident  persons. 

Section  32.  That  there  shall  be  assessed,  levied,  and 
collected,  except  as  herein  otherwise  provided,  a  tax  of 

(312) 


Appdx.)  INCOME   TAX  LAW   OF    1894 

two  per  centum  annually  on  the  net  profits  or  income  above 
actual  operating  and  business  expenses,  including  expenses 
for  materials  purchased  for  manufacture  or  bought  for  re- 
sale, losses,  and  interest  on  bonded  and  other  indebtedness, 
of  all  banks,  banking  institutions,  trust  companies,  savings 
institutions,  fire,  marine,  life,  and  other  insurance  compan- 
ies, railroad,  canal,  turnpike,  canal  navigation,  slack  wa- 
ter, telephone,  telegraph,  express,  electric  light,  gas,  water, 
street  railway  companies,  and  all  other  corporations,  com- 
panies, or  associations  doing  business  for  profit  in  the 
United  States,  no  matter  how  created  and  organized,  but 
not  including  partnerships. 

That  said  tax  shall  be  paid  on  or  before  the  first  day  of 
July  in  each  year;  and  if  the  president  or  other  chief  officer 
of  any  corporation,  company,  or  association,  or  in  the  case 
of  any  foreign  corporation,  company,  or  association,  the 
resident  manager  or  agent,  shall  neglect  or  refuse  to  file 
with  the  collector  of  the  internal  revenue  district  in  which 
said  corporation,  company,  or  association  shall  be  located 
or  be  engaged  in  business,  a  statement  verified  by  his  oath 
or  affirmation,  in  such  form  as  shall  be  prescribed  by  the 
Commissioner  of  Internal  Revenue,  with  the  approval  of 
the  Secretary  of  the  Treasury,  showing  the  amount  of  net 
profits  or  income  received  by  said  corporation,  company,  or 
association  during  the  whole  calendar  year  last  preceding 
the  date  of  filing  said  statement  as  hereinafter  required,  the 
corporation,  company,  or  association  making  default  shall 
forfeit  as  a  penalty  the  sum  of  one  thousand  dollars  and 
two  per  centum  on  the  amount  of  taxes  due,  for  each  month 
until  the  same  is  paid,  the  payment  of  said  penalty  to  be 
enforced  as  provided  in  other  cases  of  neglect  and  refusal 
to  make  return  of  taxes  under  the  internal  revenue  laws. 

The  net  profits  or  income  of  all  corporations,  companies, 
or  associations  shall  include  the  amounts  paid  to  share- 
holders, or  carried  to  the  account  of  any  fund,  or  used  for 

(313) 


INCOME    TAXATION  (Appdx. 

construction,  enlargement  of  plant,  or  any  other  expendi- 
ture or  investment  paid  from  the  net  annual  profits  made 
or  acquired  by  said  corporations,  companies,  or  associa- 
tions. 

That  nothing  herein  contained  shall  apply  to  states, 
counties,  or  municipalities;  nor  to  corporations,  compan- 
ies, or  associations  organized  and  conducted  solely  for 
charitable,  religious,  or  educational  purposes,  including 
fraternal  beneficiary  societies,  orders,  or  associations  op- 
erating upon  the  lodge  system  and  providing  for  the  pay- 
ment of  life,  sick,  accident,  and  other  benefits  to  the  mem- 
bers of  such  societies,  orders,  or  associations  and  depend- 
ents of  such  members;  nor  to  the  stocks,  shares,  funds,  or 
securities  held  by  any  fiduciary  or  trustee  for  charitable, 
religious,  or  educational  purposes;  nor  to  building  and  loan 
associations  or  companies  which  make  loans  only  to  their 
shareholders ;  nor  to  such  savings  banks,  savings  institu- 
tions or  societies  as  shall,  first,  have  no  stockholders  or 
members  except  depositors  and  no  capital  except  deposits ; 
secondly,  shall  not  receive  deposits  to  an  aggregate 
amount,  in  any  one  year,  of  more  than  one  thousand  dol- 
lars from  the  same  depositor;  thirdly,  shall  not  allow  an 
accumulation  or  total  of  deposits,  by  any  one  depositor, 
exceeding  ten  thousand  dollars;  fourthly,  shall  actually 
divide  and  distribute  to  its  depositors,  ratably  to  deposits, 
all  the  earnings  over  the  necessary  and  proper  expenses  of 
such  bank,  institution,  or  society,  except  such  as  shall  be 
applied  to  surplus;  fifthly,  shall  not  possess,  in  any  form, 
a  surplus  fund  exceeding  ten  per  centum  of  its  aggregate  de- 
posits; nor  to  such  savings  banks,  savings  institutions,  or 
societies  composed  of  members  who  do  not  participate  in 
the  profits  thereof  and  which  pay  interest  or  dividends 
only  to  their  depositors;  nor  to  that  part  of  the  business 
of  any  savings  bank,  institution,  or  other  similar  associa- 
tion having  a  capital  stock  that  is  conducted  on  the  mutual 
(314) 


Appdx.)  INCOME   TAX  LAW   OF    1894 

plan  solely  for  the  benefit  of  its  depositors  on  such  plan, 
and  which  shall  keep  its  accounts  or  its  business  conducted 
on  such  mutual  plan  separate  and  apart  from  its  other 
accounts. 

Nor  to  any  insurance  company  or  association  which  con- 
ducts all  its  business  solely  upon  the  mutual  plan,  and  only 
for  the  benefit  of  its  policy  holders  or  members,  and  having 
no  capital  stock  and  no  stock  or  shareholders,  and  holding 
all  its  property  in  trust  and  in  reserve  for  its  policy  hold- 
ers or  members;  nor  to  that  part  of  the  business  of  any 
insurance  company  having  a  capital  stock  and  stock  and 
shareholders,  which  is  conducted  on  the  mutual  plan, 
separate  from  its  stock  plan  of  insurance,  and  solely  for 
the  benefit  of  the  policy  holders  and  members  insured  on  said 
mutual  plan,  and  holding  all  the  property  belonging  to  and 
derived  from  said  mutual  part  of  its  business  in  trust  and 
reserve  for  the  benefit  of  its  policy  holders  and  members 
insured  on  said  mutual  plan. 

That  all  state,  county,  municipal,  and  town  taxes  paid 
by  corporations,  companies,  or  associations,  shall  be  in- 
cluded in  the  operating  and  business  expenses  of  such  cor- 
porations, companies,  or  associations. 

Section  33.  That  there  shall  be  levied,  collected,  and 
paid  on  all  salaries  of  officers,  or  payments  for  services  to 
persons  in  the  civil,  military,  naval,  or  other  employment 
or  service  of  the  United  States,  including  senators  and  rep- 
resentatives and  delegates  in  congress,  when  exceeding  the 
rate  of  four  thousand  dollars  per  annum,  a  tax  of  two  per 
centum  on  the  excess  above  the  said  four  thousand  dollars ; 
and  it  shall  be  the  duty  of  all  paymasters  and  all  disburs- 
ing officers  under  the  government  of  the  United  States,  or 
persons  in  the  employ  thereof,  when  making  any  payment 
to  any  officers  or  persons  as  aforesaid,  whose  compensation 
is  determined  by  a  fixed  salary,  or  upon  the  settling  or  ad- 
justing the  accounts  of  such  officers  or  persons,  to  deduct 

(315) 


INCOME    TAXATION  (Appdx. 

and  withhold  the  aforesaid  tax  of  two  per  centum;  and 
the  pay  roll,  receipts,  or  account  of  officers  or  persons  pay- 
ing such  tax  as  aforesaid  shall  be  made  to  exhibit  the  fact 
of  such  payment.  And  it  shall  be  the  duty  of  the  account- 
ing officers  of  the  treasury  department,  when  auditing  the 
accounts  of  any  paymaster  or  disbursing  officer,  or  any 
officer  withholding  his  salary  from  moneys  received  by 
him,  or  when  settling  or  adjusting  the  accounts  of  any  such 
officer,  to  require  evidence  that  the  taxes  mentioned  in 
this  section  have  been  deducted  and  paid  over  to  the  Treas- 
urer of  the  United  States,  or  other  officer  authorized  to  re- 
ceive the  same.  Every  corporation  which  pays  to  any  em- 
ploy6  a  salary  or  compensation  exceeding  four  thousand 
dollars  per  annum  shall  report  the  same  to  the  collector  or 
deputy  collector  of  his  district  and  said  employ^  shall  pay 
thereon,  subject  to  the  exemptions  herein  provided  for,  the 
tax  of  two  per  centum  on  the  excess  of  his  salary  over  four 
thousand  dollars ;  Provided  that  salaries  due  to  state,  coun- 
ty, or  municipal  officers  shall  be  exempt  from  the  income 
tax  herein  levied. 

Section  34.  That  sections  thirty-one  hundred  and  sixty-sev- 
en, thirty-one  hundred  and  seventy-two,  thirty-one  hundred 
and  seventy-three,  and  thirty-one  hundred  and  seventy-six  of 
the  Revised  Statutes  of  the  United  States  as  amended  are 
hereby  amended  so  as  to  read  as  follows : 

Section  3167.  That  it  shall  be  unlawful  for  any  collector, 
deputy  collector,  agent,  clerk  or  other  officer  or  employe  of 
the  United  States  to  divulge  or  to  make  known  in  any  manner 
whatever  not  provided  by  law  to  any  person  the  operations, 
style  of  work  or  apparatus  of  any  manufacturer  or  producer 
visited  by  him  in  the  discharge  of  his  official  duties,  or  the 
amount  or  source  of  income,  profits,  losses,  expenditures,  or 
any  particular  thereof,  set  forth  or  disclosed  in  any  income 
return  by  any  person  or  corporation,  or  to  permit  any  income 
return  or  copy  thereof  or  any  book  containing  any  abstract  or 

(316) 


Appdx.)  INCOME  TAX  LAW  OF    1894 

particulars  thereof,  to  be  seen  or  examined  by  any  person  ex- 
cept as  provided  by  law;  and  it  shall  be  unlawful  for  any 
person  to  print  or  publish  in  any  manner  whatever  not  pro- 
vided by  law  any  income  return  or  any  part  thereof  or  the 
amount  or  source  of  income,  profits,  losses,  or  expenditures 
appearing  in  any  income  return;  and  any  offense  against 
the  foregoing  provision  shall  be  a  misdemeanor  and  be  pun- 
ished by  a  fine  not  exceeding  one  thousand  dollars  or  by  im- 
prisonment not  exceeding  one  year,  or  both,  at  the  discretion 
of  the  court;  and  if  the  offender  be  an  officer  or  employe  of 
the  United  States  he  shall  be  dismissed  from  office  and  be 
incapable  thereafter  of  holding  any  office  under  the  Govern- 
ment. 

Section  3172.  That  every  collector  shall,  from  time  to  time, 
cause  his  deputies  to  proceed  through  every  part  of  his  dis- 
trict and  inquire  after  and  concerning  all  persons  therein 
who  are  liable  to  pay  any  internal  revenue  tax,  and  all  persons 
owning  or  having  the  care  and  management  of  any  objects  lia- 
ble to  pay  any  tax,  and  to  make  a  list  of  such  persons  and 
enumerate  said  objects. 

Section  3173.  It  shall  be  the  duty  of  any  person,  partner- 
ship, firm,  association,  or  corporation,  made  liable  to  any  duty, 
special  tax,  or  other  tax  imposed  by  law,  when  not  otherwise 
provided  for,  in  case  of  a  special  tax,  on  or  before  the  thirty- 
first  day  of  July  in  each  year,  in  case  of  income  tax  on  or 
before  the  first  Monday  of  March  in  each  year,  and  in  other 
cases  before  the  day  on  which  the  taxes  accrue,  to  make  a 
list  or  return,  verified  by  oath  or  affirmation,  to  the  collector 
or  a  deputy  collector  of  the  district  where  located,  of  the 
articles  or  objects,  including  the  amount  of  annual  income 
charged  with  a  duty  or  tax,  the  quantity  of  goods,  wares,  and 
merchandise  made  or  sold  and  charged  with  a  tax,  the  several 
rates  and  aggregate  amount,  according  to  the  forms  and  reg- 
ulations to  be  prescribed  by  the  Commissioner  of  Internal 
Revenue,  with  the  approval  of  the  Secretary  of  the  Treasury, 

(317) 


INCOME   TAXATION  (Appdx. 

for  which  such  person,  partnership,  firm,  association,  or  cor- 
poration is  liable :  Provided  that  if  any  person  liable  to  pay 
any  duty  or  tax,  or  owning,  possessing,  or  having  the  care 
or  management  of  property,  goods,  wares,  and  merchandise, 
articles  or  objects  liable  to  pay  any  duty,  tax,  or  license,  shall 
fail  to  make  and  exhibit  a  list  or  return  required  by  law,  but 
shall  consent  to  disclose  the  particulars  of  any  and  all  the 
property,  goods,  wares,  and  merchandise,  articles,  and  ob- 
jects liable  to  pay  any  duty  or  tax,  or  any  business  or  occupa- 
tion liable  to  pay  any  tax  as  aforesaid,  then,  and  in  that  case, 
it  shall  be  the  duty  of  the  collector  or  deputy  collector  to 
make  such  list  or  return,  which,  being  distinctly  read,  con- 
sented to,  and  signed  and  verified  by  oath  or  affirmation  by  the 
person  so  owning,  possessing,  or  having  the  care  and  manage- 
ment as  aforesaid,  may  be  received  as  the  list  of  such  person : 
Provided  further,  that  in  case  no  annual  list  or  return  has 
been  rendered  by  such  person  to  the  collector  or  deputy  col- 
lector as  required  by  law,  and  the  person  shall  be  absent  from 
his  or  her  residence  or  place  of  business  at  the  time  the  col- 
lector or  a  deputy  collector  shall  call  for  the  annual  list  or 
return,  it  shall  be  the  duty  of  such  collector  or  deputy  col- 
lector to  leave  at  such  place  of  residence  or  business,  with 
some  one  of  suitable  age  and  discretion,  if  such  be  present, 
otherwise  to  deposit  in  the  nearest  post  office,  a  note  or  mem- 
orandum addressed  to  such  person,  requiring  him  or  her  to 
render  to  such  collector  or  deputy  collector  the  list  or  return 
required  by  law  within  ten  days  from  the  date  of  such  note 
or  memorandum,  verified  by  oath  or  affirmation.  And  if  any 
person,  on  being  notified  or  required  as  aforesaid,  shall  refuse 
or  neglect  to  render  such  list  or  return  within  the  time  required 
as  aforesaid,  or  whenever  any  person  who  is  required  to  de- 
liver a  monthly  or  other  return  of  objects  subject  to  tax  fails 
to  do  so  at  the  time  required,  or  delivers  any  return  which, 
in  the  opinion  of  the  collector  is  false  or  fraudulent,  or  con- 
tains any  undervaluation  or  understatement,  it  shall  be  lawful 

(318) 


Appdx.)  INCOME   TAX  LAW  OF   1894 

for  the  collector  to  summon  such  person,  or  any  other  per- 
son having-  possession,  custody,  or  care  of  books  of  account 
containing  entries  relating  to  the  business  of  such  person,  or 
any  other  person  he  may  deem  proper,  to  appear  before  him 
and  produce  such  books,  at  a  time  and  place  named  in  the 
summons,  and  to  give  testimony  or  answer  interrogatories, 
under  oath,  respecting  any  objects  liable  to  tax  or  the  re- 
turns thereof.  The  collector  may  summon  any  person  resid- 
ing or  found  within  the  state  in  which  his  district  lies;  and 
when  the  person  intended  to  be  summoned  does  not  reside  and 
cannot  be  found  within  such  state,  he  may  enter  any  collection 
district  where  such  person  may  be  found  and  there  make  the 
examination  herein  authorized.  And  to  this  end  he  may  there 
exercise  all  the  authority  which  he  might  lawfully  exercise 
in  the  district  for  which  he  was  commissioned. 

Section  3176.  When  any  person,  corporation,  company,  or 
association  refuses  or  neglects  to  render  any  return  or  list 
required  by  law,  or  renders  a  false  or  fraudulent  return  or 
list,  the  collector  or  any  deputy  collector  shall  make,  accord- 
ing to  the  best  information  which  he  can  obtain,  including 
that  derived  from  the  evidence  elicited  by  the  examination  of 
the  collector,  and  on  his  own  view  and  information,  such  list 
or  return,  according  to  the  form  prescribed,  of  the  income, 
property,  and  objects  liable  to  tax  owned  or  possessed  or  under 
the  care  or  management  of  such  person  or  corporation,  com- 
pany or  association,  and  the  Commissioner  of  Internal  Rev- 
enue shall  assess  all  taxes  not  paid  by  stamps,  including  the 
amount,  if  any,  due  for  special  tax,  income  or  other  tax,  and 
in  case  of  any  return  of  a  false  or  fraudulent  list  or  valuation 
intentionally  he  shall  add  one  hundred  per  centum  to  such  tax ; 
and  in  case  of  a  refusal  or  neglect,  except  in  cases  of  sickness 
or  absence,  to  make  a  list  or  return,  or  to  verify  the  same  as 
aforesaid,  he  shall  add  fifty  per  centum  to  such  tax.  In  case 
of  neglect  occasioned  by  sickness  or  absence  as  aforesaid  the 
collector  may  allow  such  further  time  for  making  and  deliver- 

(339) 


INCOME   TAXATION  (Appdx. 

ing  such  list  or  return  as  he  may  deem  necessary,  not  exceed- 
ing thirty  days.  The  amount  so  added  to  the  tax  shall  be 
collected  at  the  same  time  and  in  the  same  manner  as  the 
tax,  unless  the  neglect  or  falsity  is  discovered  after  the  tax  has 
been  paid,  in  which  case  the  amount  so  added  shall  be  col- 
lected in  the  same  manner  as  the  tax;  and  the  list  or  return 
so  made  and  subscribed  by  such  collector  or  deputy  collector 
shall  be  held  prima  facie  good  and  sufficient  for  all  legal  pur- 
poses. 

Section  35.  That  every  corporation,  company,  or  associa- 
tion doing  business  for  a  profit  shall  make  and  render  to  the 
collector  of  its  collection  district,  on  or  before  the  first  Mon- 
day of  March  in  every  year,  beginning  with  the  year  eighteen 
hundred  and  ninety-five,  a  full  return,  verified  by  oath  or 
affirmation,  in  such  form  as  the  Commissioner  of  Internal 
Revenue  shall  prescribe,  of  all  the  following  matters  for  the 
whole  calendar  year  last  preceding  the  date  of  such  return : 

First.  The  gross  profits  of  such  corporation,  company,  or 
association  from  all  kinds  of  business  of  every  name  and  na- 
ture. 

Second.  The  expenses  of  such  corporation,  company,  or  as- 
sociation, exclusive  of  interest,  annuities,  and  dividends. 

Third.  The  net  profits  of  such  corporation,  company,  or 
association,  without  allowance  for  interest,  annuities,  or  divi- 
dends. 

Fourth.  The  amount  paid  on  account  of  interest,  annuities, 
and  dividends,  stated  separately. 

Fifth.  The  amount  paid  in  salaries  of  four  thousand  dollars 
or  less  to  each  person  employed. 

Sixth.  The  amount  paid  in  salaries  of  more  than  four 
thousand  dollars  to  each  person  employed  and  the  name  and 
address  of  each  of  such  persons  and  the  amount  paid  to  each. 

Section  36.  That  it  shall  be  the  duty  of  every  corporation, 
company,  or  association  doing  business  for  profit  to  keep  full, 
regular,  and  accurate  books  of  account,  upon  which  all  its 

(320) 


Appdx.)  INCOME   TAX  LAW  OF  1894 

transactions  shall  be  entered  from  day  to  day,  in  regular  or- 
der, and  whenever  a  collector  or  deputy  collector  of  the  dis- 
trict in  which  any  corporation,  company,  or  association  is  as- 
sessable shall  believe  that  a  true  and  correct  return  of  the 
income  of  such  corporation,  company,  or  association  has  not 
been  made,  he  shall  make  an  affidavit  of  such  belief  and  of 
the  grounds  upon  which  it  is  founded,  and  file  the  same  with 
the  Commissioner  of  Internal  Revenue,  and  if  said  Commis- 
sioner shall,  on  examination  thereof,  and  after  full  hearing 
upon  notice  given  to  all  parties,  conclude  there  is  good  ground 
for  such  belief,  he  shall  issue  a.  request  in  writing  to  such  cor- 
poration, company,  or  association  to  permit  an  inspection  of 
the  books  of  such  corporation,  company,  or  association  to 
be  made;  and  if  such  corporation,  company,  or  association 
shall  refuse  to  comply  with  such  request,  then  the  collector  or 
deputy  collector  of  the  district  shall  make  from  such  informa- 
tion as  he  can  obtain  an  estimate  of  the  amount  of  such  in- 
come, and  then  add  fifty  per  centum  thereto,  which  said  as- 
sessment so  made  shall  then  be  the  lawful  assessment  of  such 
income. 

Section  37.  That  it  shall  be  the  duty  of  every  collector  of 
internal  revenue,  to  whom  any  payment  of  any  tax  other 
than  the  tax  represented  by  an  adhesive  stamp  or  other  en- 
graved stamp  is  made  under  the  provisions  of  this  act,  to  give 
to  the  person  making  such  payment  a  full  written  or  printed 
receipt,  expressing  the  amount  paid  and  the  particular  ac- 
count for  which  such  payment  was  made ;  and  whenever  such 
payment  is  made  such  collector  shall,  if  required,  give  a  sep- 
arate receipt  for  each  tax  paid  by  any  debtor,  on  account  of 
payments  made  to  or  to  be  made  by  him  to  separate  creditors 
in  such  form  that  such  debtor  can  conveniently  produce  the 
same  separately  to  his  several  creditors  in  satisfaction  of  their 
respective  demands  to  the  amounts  specified  in  such  receipts; 
and  such  receipts  shall  be  sufficient  evidence  in  favor  of  such 
debtor,  to  justify  him  in  withholding  the  amount  therein  ex- 
BL.INC.TAX.— 21  (321) 


INCOME   TAXATION  (Appdx. 

pressed  from  his  next  payment  to  his  creditor;  but  such 
creditor  may,  upon  giving  to  his  debtor  a  full  written  receipt, 
acknowledging  the  payment  to  him  of  whatever  sum  may  be 
actually  paid,  and  accepting  the  amount  of  tax  paid  as  afore- 
said (specifying  the  same)  as  a  further  satisfaction  of  the  debt 
to  that  amount,  require  the  surrender  to  him  of  such  collector's 
receipt. 

[NOTE.  By  a  joint  resolution  of  February  21,  1895  (28 
Stat.  971),  the  time  for  making  returns  of  income  for  the  year 
1894  was  extended,  and  it  was  provided  that,  "in  computing 
incomes  under  said  act  the  amounts  necessarily  paid  for  fire  in- 
surance premiums  and  for  ordinary  repairs  shall  be  deducted ;" 
and  that  "in  computing  incomes  under  said  act  the  amounts 
received  as  dividends  upon  the  stock  of  any  corporation, 
company,  or  association  shall  not  be  included  in  case  such  divi- 
dends are  also  liable  to  the  tax  of  two  per  centum  upon  the  net 
profits  of  said  corporation,  company,  or  association,  although 
such  tax  may  not  have  been  actually  paid  by  said  corporation, 
company,  or  association  at  the  time  of  making  returns  by  the 
person,  corporation,  or  association  receiving  such  dividends, 
and  returns  or  reports  of  the  names  and  salaries  of  employes 
shall  not  be  required  from  employers  unless  called  for  by  the 
collector  in  order  to  verify  the  returns  of  employes."] 

(322) 


Appdx.)        CIVIL   WAE  INCOME   TAX  ACTS  OF  CONGBESS 


CIVIL  WAR   INCOME  TAX   ACTS   OF   CONGRESS 

Act  of  Congress  August  5,  1861,  ch.  45,  §§  49-51,  12  Stat. 
309 

Section  49.  From  and  after  the  first  day  of  January  next, 
there  shall  be  levied,  collected,  and  paid,  upon  the  annual  in- 
come of  every  person  residing  within  the  United  States,  wheth- 
er such  income  is  derived  from  any  kind  of  property,  or  from 
any  profession,  trade,  employment,  or  vocation  carried  on  in 
the  United  States  or  elsewhere,  or  from  any  other  source  what- 
ever, if  such  annual  income  exceeds  the  sum  of  eight  hundred 
dollars,  a  tax  of  three  per  centum  on  the  amount  of  such  ex- 
cess of  such  income  above  eight  hundred  dollars:  Provided, 
that  upon  such  portion  of  said  income  as  shall  be  derived  from 
interest  upon  treasury  notes  or  other  securities  of  the  United 
States,  there  shall  be  levied,  collected,  and  paid  a  tax  of  one 
and  one-half  per  centum.  Upon  the  income,  rents,  or  divi- 
dends accruing  upon  any  property,  securities,  or  stocks  owned 
in  the  United  States  by  any  citizen  of  the  United  States  re- 
siding abroad,  there  shall  be  levied,  collected,  and  paid  a  tax 
of  five  per  centum,  excepting  that  portion  of  said  income  de- 
rived from  interest  on  treasury  notes  or  other  securities  of  the 
Government  of  the  United  States,  which  shall  pay  one  and 
one-half  per  centum.  The  tax  herein  provided  shall  be  as- 
sessed upon  the  annual  income  of  the  persons  hereinafter 
named  for  the  year  next  preceding  the  time  for  assessing  said 
tax,  to  wit,  the  year  next  preceding  the  first  of  January,  eight- 
een hundred  and  sixty-two,  and  the  said  taxes,  when  so  as- 
sessed and  made  public,  shall  become  a  lien  on  the  property 
or  other  sources  of  said  income  for  the  amount  of  the  same, 
with  the  interest  and  other  expenses  of  collection  until  paid: 
Provided,  that,  in  estimating  said  income,  all  national,  state,  or 

(323) 


INCOME   TAXATION  (Appdx. 

local  taxes  assessed  upon  the  property,  from  which  the  in- 
come is  derived,  shall  be  first  deducted. 

Section  50.  It  shall  be  the  duty  of  the  President  of  the 
United  States,  and  he  is  hereby  authorized,  by  and  with  the 
advice  and  consent  of  the  Senate,  to  appoint  one  principal 
assessor  and  one  principal  collector  in  each  of  the  States  and 
Territories  of  the  United  States,  and  in  the  District  of  Colum- 
bia, to  assess  and  collect  the  internal  duties  or  income  tax 
imposed  by  this  act,  with  authority  in  each  of  said  officers  to 
appoint  so  many  assistants  as  the  public  service  may  require, 
to  be  approved  by  the  Secretary  of  the  Treasury.  The  said 
taxes  to  be  assessed  and  collected  under  such  regulations  as 
the  Secretary  of  the  Treasury  may  prescribe.  The  said  col- 
lectors, herein  authorized  to  be  appointed,  shall  give  bonds,  to 
the  satisfaction  of  the  Secretary  of  the  Treasury,  in  such  sums 
as  he  may  prescribe,  for  the  faithful  performance  of  their 
respective  duties.  And  the  Secretary  of  the  Treasury  shall 
prescribe  such  reasonable  compensation  for  the  assessment  and 
collection  of  said  internal  duties  or  income  tax  as  may  appear 
to  him  just  and  proper;  not,  however,  to  exceed  in  any  case 
the  sum  of  two  thousand  five  hundred  dollars  per  annum 
for  the  principal  officers  herein  referred  to,  and  twelve  hun- 
dred dollars  per  annum  for  an  assistant.  The  assistant  col- 
lectors herein  provided  shall  give  bonds  to  the  satisfaction  of 
the  principal  collector  for  the  faithful  performance  of  their 
duties.  The  Secretary  of  the  Treasury  is  further  authorized 
to  select  and  appoint  one  or  more  depositaries  in  each  State 
for  the  deposit  and  safe-keeping  of  the  moneys  arising  from 
the  taxes  herein  imposed  when  collected,  and  the  receipt  of 
the  proper  officer  of  such  depository  to  the  collector  for  the 
moneys  deposited  by  him  shall  be  the  proper  voucher  for  such 
collector  in  the  settlement  of  his  account  at  the  Treasury  De- 
partment. And  he  is  further  authorized  and  empowered  to 
make  such  officer  or  depositary  the  disbursing  agent  of  the 
Treasury  for  the  payment  of  all  interest  due  to  the  citizens 

(324) 


Appdx.)        CIVIL  WAR  INCOME  TAX  ACTS   OF   CONGRESS 

of  such  State  upon  the  treasury  notes  or  other  government 
securities  issued  by  authority  of  law.  And  he  shall  also  pre- 
scribe the  forms  of  returns  to  be  made  to  the  department  by 
all  assessors  and  collectors  appointed  under  the  authority  of 
this  act.  He  shall  also  prescribe  the  form  of  oath  or  obliga- 
tion to  be  taken  by  the  several  officers  authorized  or  directed 
to  be  appointed  and  commissioned  by  the  President  under  this 
act,  before  a  competent  magistrate  duly  authorized  to  admin- 
ister oaths,  and  the  form  of  the  return  to  be  made  thereon  to 
the  Treasury  Department. 

Section  51.  The  tax  herein  imposed  by  the  forty-ninth  sec- 
tion of  this  act  shall  be  due  and  payable  on  or  before  the 
thirtieth  day  of  June  in  the  year  1862,  and  all  sums  due  and 
unpaid  at  that  day  shall  draw  interest  thereafter  at  the  rate 
of  six  per  centum  per  annum;  and  if  any  person  or  persons 
shall  neglect  or  refuse  to  pay  after  due  notice  said  tax  assessed 
against  him,  her,  or  them,  for  the  space  of  more  than  thirty 
days  after  the  same  is  due  and  payable,  it  shall  be  lawful  for 
any  collector  or  assistant  collector  charged  with  the  duty  of 
collecting  said  tax,  and  they  are  hereby  authorized,  to  levy  the 
same  on  the  visible  property  of  any  such  person,  or  so  much 
thereof  as  may  be  sufficient  to  pay  such  tax  with  the  interest 
due  thereon  and  the  expenses  incident  to  such  levy  and  sale, 
first  giving  thirty  days'  public  notice  of  the  time  and  place  of 
the  sale  thereof ;  and  in  case  of  the  failure  of  any  person  or 
persons  authorized  to  act  as  agent  or  agents  for  the  collection 
of  the  rents  or  other  income  of  any  person  residing  abroad 
shall  neglect  or  refuse  to  pay  the  tax  assessed  thereon  (hav- 
ing had  due  notice)  for  more  than  thirty  days  after  the  thir- 
tieth of  June,  1862,  the  collector  or  his  assistant,  for  the  dis- 
trict where  such  property  is  located,  or  rents  or  income  is 
payable,  shall  be  and  is  hereby  authorized  to  levy  upon  the 
property  itself,  and  to  sell  the  same,  or  so  much  thereof  as 
may  be  necessary  to  pay  the  tax  assessed,  together  with  the 
interest  and  expenses  incident  to  such  levy  and  sale,  first  giv- 

(325) 


INCOME    TAXATION  (Appdx. 

ing  thirty  days'  public  notice  of  the  time  and  place  of  sale. 
And  in  all  cases  of  the  sale  of  property  herein  authorized,  the 
conveyance  by  the  officer  authorized  to  make  the  sale,  duly  ex- 
ecuted, shall  give  a  valid  title  to  the  purchaser,  whether  the 
property  sold  shall  be  real  or  personal.  And  the  several  col- 
lectors and  assistants  appointed  under  the  authority  of  this 
act  may,  if  they  find  no  property  to  satisfy  the  taxes  assessed 
upon  any  person  by  authority  of  the  forty-ninth  section  of 
this  act,  and  which  such  person  neglects  to  pay  as  hereinbe- 
fore provided,  shall  have  power,  and  it  shall  be  their  duty,  to 
examine  under  oath  the  person  assessed  under  this  act,  or  any 
other  person,  and  may  sell  at  public  auction,  after  ten  days' 
notice,  any  stock,  bonds,  or  choses  in  action,  belonging  to  said 
person,  or  so  much  thereof  as  will  pay  such  tax  and  the  ex- 
penses of  such  sale ;  and  in  case  he  refuses  to  testify,  the  said 
several  collectors  and  assistants  shall  have  power  to  arrest 
such  person  and  commit  him  to  prison,  to  be  held  in  custody 
until  the  same  shall  be  paid,  with  interest  thereon  at  the  rate 
of  six  per  centum  per  annum,  from  the  time  when  the  same 
was  payable  as  aforesaid,  and  all  fees  and  charges  of  such 
commitment  and  custody.  And  the  place  of  custody  shall  in 
all  cases  be  the  same  provided  by  law  for  the  custody  of  per- 
sons committed  for  any  cause  by  the  authority  of  the  United 
States,  and  the  warrant  of  the  collector,  stating  the  cause  of 
commitment,  shall  be  sufficient  authority  to  the  proper  officer 
for  receiving  and  keeping  such  person  in  custody  until  the 
amount  of  said  tax  and  interest,  and  all  fees  and  the  expense 
of  such  custody,  shall  have  been  fully  paid  and  discharged; 
which  fees  and  expenses  shall  be  the  same  as  are  chargeable 
under  the  laws  of  the  United  States  in  other  cases  of  commit- 
ment and  custody.  And  it  shall  be  the  duty  of  such  collector 
to  pay  the  expenses  of  such  custody,  and  the  same,  with  his 
fees,  shall  be  allowed  on  settlement  of  his  accounts.  And  the 
person  so  committed  shall  have  the  same  right  to  be  discharged 
from  such  custody  as  may  be  allowed  by  the  laws  of  the  State 

(326) 


Appdx.)        CIVIL  WAR   INCOME   TAX   ACTS   OF   CONGEE8S 

or  Territory,  or  the  District  of  Columbia,  where  he  is  so  held 
in  custody,  to  persons  committed  under  the  laws  of  such  State 
or  Territory,  or  District  of  Columbia,  for  the  non-payment  of 
taxes,  and  in  the  manner  provided  by  such  laws ;  or  he  may  be 
discharged  at  any  time  by  order  of  the  Secretary  of  the  Treas- 
ury. 

Act  of  Congress  July  1,  1862,  ch.  119,  §§  89-93,  12  Stat. 
432,  473 

Sec.  89.  And  be  it  further  enacted,  that  for  the  purpose 
of  modifying  and  re-enacting,  as  hereinafter  provided,  so 
much  of  an  act,  entitled  "An  act  to  provide  increased  reve- 
nue from  imports  to  pay  interest  on  the  public  debt,  and  for 
other  purposes,"  approved  fifth  of  August,  eighteen  hundred 
and  sixty-one,  as  relates  to  income  tax;  that  is  to  say,  sec- 
tions forty-nine,  fifty  (except  so  much  as  relates  to  the  se- 
lection and  appointment  of  depositaries)  and  fifty-one,  be, 
and  the  same  are  hereby,  repealed. 

Sec.  90. '  And  be  it  further  enacted,  That  there  shall  be 
levied,  collected,  and  paid  annually,  upon  the  annual  gains, 
profits,  or  income  of  every  person  residing  within  the  Unit- 
ed States,  whether  derived  from  any  kind  of  property, 
rents,  interest,  dividends,  salaries,  or  from  any  profession, 
trade,  employment,  or  vocation  carried  on  in  the  United 
States  or  elsewhere,  or  from  any  other  source  whatever,  ex- 
cept as  hereinafter  mentioned,  if  such  annual  gains,  profits, 
or  income  exceed  the  sum  of  six  hundred  dollars,  and  do  not 
exceed  the  sum  of  ten  thousand  dollars,  a  duty  of  three  per 
centum  on  the  amount  of  such  annual  gains,  profits,  or  in- 
come over  and  above  the  said  sum  of  six  hundred  dollars ; 
if  said  income  exceeds  the  sum  of  ten  thousand  dollars,  a 
duty  of  five  per  centum  upon  the  amount  thereof  exceeding 
six  hundred  dollars;  and  upon  the  annual  gains,  profits,  or 
income,  rents,  and  dividends  accruing  upon  any  property, 
securities,  and  stocks  owned  in  the  United  States  by  any 

(327) 


INCOME   TAXATION  (Appdx. 

citizen  of  the  United  States  residing  abroad,  except  as  here- 
inafter mentioned,  and  not  in  the  employment  of  the  govern- 
ment of  the  United  States,  there  shall  be  levied,  collected, 
and  paid  a  duty  of  five  per  centum. 

Sec.  91.  And  be  it  further  enacted  that  in  estimating 
said  annual  gains,  profits,  or  income,  whether  subject  to  a 
duty,  as  provided  in  this  act,  of  three  per  centum  or  of  five 
per  centum,  all  other  national,  state,  and  local  taxes,  law- 
fully assessed  upon  the  property  or  other  sources  of  income 
of  any  person  as  aforesaid,  from  which  said  annual  gains, 
profits,  or  income  of  such  person  is  or  should  be  derived, 
shall  be  first  deducted  from  the  gains,  profits,  or  income  of 
the  person  or  persons,  who  actually  pay  the  same,  whether 
owner  or  tenant,  and  all  gains,  profits,  or  income  derived 
from  salaries  of  officers,  or  payments  to  persons  in  the  civil, 
military,  naval,  or  other  service  of  the  United  States,  in- 
cluding senators,  representatives,  and  delegates  in  Congress, 
above  six  hundred  dollars,  or  derived  from  interest  or  divi- 
dends on  stock,  capital,  or  deposits  in  any  bank,  trust  com- 
pany, or  savings  institution,  insurance,  gas,  bridge,  express, 
telegraph,  steamboat,  ferry-boat,  or  railroad  company  or  cor- 
poration, or  on  any  bonds  or  other  evidences  of  indebtedness 
of  any  railroad  company  or  other  corporation,  which  shall 
have  been  assessed  and  paid  by  said  banks,  trust  companies, 
savings  institutions,  insurance,  gas,  bridge,  telegraph,  steam- 
boat, ferry-boat,  express,  or  railroad  companies,  as  aforesaid, 
or  derived  from  advertisements,  or  on  any  articles  manufac- 
tured, upon  which  specific,  stamp  or  ad  valorem  duties  shall 
have  been  directly  assessed  or  paid,  shall  also  be  deducted ; 
and  the  duty  hereinbefore  provided  for  shall  be  assessed  and 
collected  upon  the  income  for  the  year  ending  the  thirty- 
first  day  of  December  next  preceding  the  time  for  levying 
and  collecting  said  duty,  that  is  to  say,  on  the  first  day  of 
May,  eighteen  hundred  and  sixty-three,  and  in  each  year 
thereafter :  Provided,  that  upon  such  portion  of  said  gains, 

(328) 


Appdx.)        CIVIL   WAR   INCOME   TAX   ACTS   OF   CONGBESS 

profits,  or  income,  whether  subject  to  a  duty  as  provided  in 
this  act  of  three  per  centum  or  of  five  per  centum,  which 
shall  be  derived  from  interest  upon  notes,  bonds,  or  other 
securities  of  the  United  States,  there  shall  be  levied,  collect- 
ed, and  paid  a  duty  not  exceeding  one  and  one-half  of  one 
per  centum,  anything  in  this  act  to  the  contrary  notwith- 
standing. 

Sec.  92.  And  be  it  further  enacted,  That  the  duties  on 
incomes  herein  imposed  shall  be  due  and  payable  on  or  be- 
fore the  thirtieth  day  of  June,  in  the  year  eighteen  hundred 
and  sixty-three,  and  in  each  year  thereafter  until  and  includ- 
ing the  year  eighteen  hundred  and  sixty-six  and  no  longer; 
and  to  any  sum  or  sums  annually  due  and  unpaid  for  thirty 
days  after  the  thirtieth  of  June  as  aforesaid,  and  for  ten  days 
after  demand  thereof  by  the  collector,  there  shall  be  levied 
in  addition  thereto  the  sum  of  five  per  centum  on  the  amount 
of  duties  unpaid,  as  a  penalty,  except  from  the  estates  of  de- 
ceased and  insolvent  persons ;  and  if  any  person  or  persons, 
or  party,  liable  to  pay  such  duty,  shall  neglect  or  refuse  to 
pay  the  same,  the  amount  due  shall  be  a  lien  in  favor  of  the 
United  States  from  the  time  it  was  so  due  until  paid,  with 
the  interest,  penalties,  and  costs  that  may  accrue  in  addition 
thereto,  upon  all  the  property,  and  rights  to  property,  stocks, 
securities,  and  debts  of  every  description  from  which  the  in- 
come upon  which  said  duty  is  assessed  or  levied  shall  have 
accrued,  or  may  or  should  accrue;  and  in  default  of  the  pay- 
ment of  said  duty  for  the  space  of  thirty  days,  after  the  same 
shall  have  become  due,  and  be  demanded,  as  aforesaid,  said 
lien  may  be  enforced  by  distraint  upon  such  property,  rights 
to  property,  stocks,  securities,  and  evidences  of  debt,  by 
whomsoever  holden;  and  for  this  purpose  the  Commissioner 
of  Internal  Revenue,  upon  the  certificate  of  the  collector  or 
deputy  collector  that  said  duty  is  due  and  unpaid  for  the 
space  of  ten  days  after  notice  duly  given  of  the  levy  of  such 
duty,  shall  issue  a  warrant  in  form  and  manner  to  be  pre- 

(329) 


INCOME   TAXATION  (Appdx. 

scribed  by  said  Commissioner  of  Internal  Revenue,  under 
the  directions  of  the  Secretary  of  the  Treasury,  and  by  vir- 
tue of  such  warrant  there  may  be  levied  on  such  property, 
rights  to  property,  stocks,  securities,  and  evidences  of  debt, 
a  further  sum,  to  be  fixed  and  stated  in  such  warrant,  over 
and  above  the  said  annual  duty,  interest,  and  penalty  for 
non-payment,  sufficient  for  the  fees  and  expenses  of  such 
levy.  And  in  all  cases  of  sale,  as  aforesaid,  the  certificate 
of  such  sale  by  the  collector  or  deputy  collector  of  the  sale, 
shall  give  title  to  the  purchaser,  of  all  right,  titlej  and  inter- 
est of  such  delinquent  in  and  to  such  property,  whether  the 
property  shall  be  real  or  personal ;  and  where  the  subject  of 
sale  shall  be  stocks,  the  certificate  of  said  sale  shall  be  law- 
ful authority  and  notice  to  the  proper  corporation,  com- 
pany, or  association,  to  record  the  same  on  the  books  or 
records,  in  the  same  manner  as  if  transferred  or  assigned  by 
the  person  or  party  holding  the  same,  to  issue  new  certifi- 
cates of  stock  therefor  in  lieu  of  any  original  or  prior  cer- 
tificates, which  shall  be  void  whether  cancelled  or  not;  and 
said  certificate  of  sale  of  the  collector  or  deputy  collector, 
where  the  subject  of  sale  shall  be  securities  or  other  evi- 
dences of  debt,  shall  be  good  and  valid  receipts  to  the  per- 
son or  party  holding  the  same,  as  against  any  person  or  per- 
sons, or  other  party  holding  or  claiming  to  hold  possession 
of  such  securities  or  other  evidences  of  debt. 

Sec.  93.  And  be  it  further  enacted,  That  it  shall  be  the 
duty  of  all  persons  of  lawful  age,  and  of  all  guardians  and 
trustees,  whether  such  trustees  are  so  by  virtue  of  their  of- 
fice as  executors,  administrators,  or  other  fiduciary  capacity, 
to  make  return  in  the  list  or  schedule,  as  provided  in  this 
act,  to  the  proper  officer  of  internal  revenue,  of  the  amount 
of  his  or  her  income,  or  the  income  of  such  minors  or  per- 
sons as  may  be  held  in  trust,  as  aforesaid,  according  to  the 
requirements  hereinbefore  stated,  and  in  case  of  neglect  or 
refusal  to  make  such  return,  the  assessor  or  assistant  asses- 

(330) 


Appdx.)         CIVIL   WAB   INCOME   TAX   ACTS   OF   CONGRESS 

sor  shall  assess  the  amount  of  his  or  her  income,  and  pro- 
ceed thereafter  to  collect  the  duty  thereon  in  the  same  man- 
ner as  is  provided  for  in  other  cases  of  neglect  and  refusal 
to  furnish  lists  or  schedules  in  the  general  provisions  of  this 
act,  where  not  otherwise  incompatible,  and  the  assistant  as- 
sessor may  increase  the  amount  of  the  list  or  return  of  any 
party  making  such  return,  if  he  shall  be  satisfied  that  the 
same  is  understated :  Provided,  that  any  party,  in  his  or  her 
own  behalf,  or  as  guardian  or  trustee,  as  aforesaid,  shall  be 
permitted  to  declare,  under  oath  or  affirmation,  the  form  and 
manner  of  which  shall  be  prescribed  by  the  Commissioner  of 
Internal  Revenue,  that  he  or  she  was  not  possessed  of  an  in- 
come of  six  hundred  dollars,  liable  to  be  assessed  according 
to  the  provisions  of  this  act,  or  that  he  or  she  has  been  as- 
sessed elsewhere  and  the  same  year  for  an  income  duty,  un- 
der authority  of  the  United  States,  and  shall  thereupon  be 
exempt  from  an  income  duty ;  or,  if  the  list  or  return  of  any 
party  shall  have  been  increased  by  the  assistant  assessor,  in 
manner  as  aforesaid,  he  or  she  may  be  permitted  to  declare, 
as  aforesaid,  the  amount  of  his  or  her  annual  income,  or  the 
amount  held  in  trust,  as  aforesaid,  liable  to  be  assessed,  as 
aforesaid,  and  the  same  so  declared  shall  be  received  as  the 
sum  upon  which  duties  are  to  be  assessed  and  collected. 

[NOTE.  This  act  was  amended  by  Act  Cong.  March  3, 
1863,  12  Stat.  713,  723,  by  adding  the  following:  "In  esti- 
mating the  annual  gains,  profits,  or  income  of  any  person, 
under  the  act  to  which  this  act  is  an  amendment,  the  amount 
actually  paid  by  such  person  for  the  rent  of  the  dwelling 
house  or  estate  on  which  he  resides  shall  be  first  deducted 
from  the  gains,  profits,  or  income  of  such  person."] 

(331) 


INCOME   TAXATION  (Appdx. 

Act  of  Congress  June  30,  1864,  13  Stat.  223,  281,  as  amend- 
ed by  Act  of  Congress  March  3,  1865,  13  Stat.  469,  479 

Section  116.  There  shall  be  levied,  collected,  and  paid  an- 
nually upon  the  annual  gains,  profits,  and  income  of  every  per- 
son residing  in  the  United  States,  or  of  any  citizen  of  the 
United  States  residing  abroad,  and  whether  derived  from  any 
kind  of  property,  rents,  interests,  dividends,  or  salaries,  or 
from  any  profession,  trade,  employment,  or  vocation,  carried 
on  in  the  United  States  or  elsewhere,  or  from  any  other  source 
whatever,  a  duty  of  five  per  centum  on  the  excess  over  six 
hundred  dollars  and  not  exceeding  five  thousand  dollars,  and 
a  duty  of  ten  per  centum  on  the  excess  over  five  thousand  dol- 
lars ;  and  in  ascertaining  the  income  of  any  person  liable  to  an 
income  tax,  the  amount  of  income  received  from  institutions 
whose  officers,  as  required  by  law,  withhold  a  per  centum  of 
the  dividends  made  by  such  institutions  and  pay  the  same  to 
the  Commissioner  of  Internal  Revenue  or  other  officer  author- 
ized to  receive  the  same,  shall  be  included,  and  the  amount  so- 
withheld  shall  be  deducted  from  the  tax  which  otherwise 
would  be  assessed  upon  such  person.  And  the  duty  herein 
provided  for  shall  be  assessed,  collected,  and  paid  upon  the 
gains,  profits,  and  income  for  the  year  ending  on  the  thirty- 
first  day  of  December  next  preceding  the  time  for  levying,  col- 
lecting, and  paying  said  duty :  Provided,  that  incomes  derived 
from  interest  upon  notes,  bonds,  and  other  securities  of  the 
United  States,  and  also  all  premiums  on  gold  and  coupons  shall 
be  included  in  estimating  incomes  under  this  act.  Provided 
further,  that  only  one  deduction  of  six  hundred  dollars  shall 
be  made  from  the  aggregate  incomes  of  all  the  members  of  any 
family  composed  of  parents  and  minor  children,  or  husband 
and  wife:  And  provided  further,  that  net  profits  realized  by 
sales  of  real  estate  purchased  within  the  year  for  which  income 
is  estimated,  shall  be  chargeable  as  income ;  and  losses  on  sales 

(332) 


Appdx.)        CIVIL   WAR   INCOME   TAX    ACTS   OF   CONGRESS 

of  real  estate  purchased  within  the  year  for  which  income  is 
estimated  shall  be  deducted  from  the  income  of  such  year. 

Section  117.  In  estimating  the  annual  gains,  profits,  and 
income  of  any  person,  all  national,  state,  county,  and  municipal 
taxes  paid  within  the  year  shall  be  deducted  from  the  gains, 
profits,  or  income  of  the  person  who  has  actually  paid  the 
same,  whether  owner,  tenant,  or  mortgagor;  also  the  salary 
or  pay  received  for  services  in  the  civil,  military,  naval,  or 
other  service  of  the  United  States,  including  senators,  repre- 
sentatives, and  delegates  in  Congress,  above  the  rate  of  six 
hundred  dollars  per  annum ;  also  the  amount  paid  by  any  per- 
son for  the  rent  of  the  homestead  used  or  occupied  by  himself 
or  his  family,  and  the  rental  value  of  any  homestead  used  or 
occupied  by  any  person  or  by  his  family,  in  his  own  right  or  in 
the  right  of  his  wife,  shall  not  be  included  and  assessed  as  part 
of  the  income  of  such  person.  In  estimating  the  annual  gains, 
profits,  or  income  of  any  person,  the  interest  received  or  ac- 
crued upon  all  notes,  bonds,  and  mortgages,  or  other  forms  of 
indebtedness  bearing  interest,  whether  paid  or  not,  if  good  and 
collectable,  less  the  interest  paid  by  or  due  from  such  person, 
shall  be  included  and  assessed  as  part  of  the  income  of  such 
person  for  each  year;  and  also  all  income  or  gains  derived 
from  the  purchase  and  sale  of  stocks  or  other  property,  real  or 
personal,  and  of  live  stock,  and  the  amount  of  live  stock,  sugar, 
wool,  butter,  cheese,  pork,  beef,  mutton,  or  other  meats,  hay 
or  grain,  or  other  vegetable  or  other  productions,  being  the 
growth  or  produce  of  the  estate  of  such  person  sold,  not  in- 
cluding any  part  thereof  unsold  or  on  hand  during  the  year 
next  preceding  the  thirty-first  of  December,  until  the  same 
shall  be  sold,  shall  be  included  and  assessed  as  part  of  the  in- 
come of  such  person  for  each  year,  and  his  share  of  the  gains 
and  profits  of  all  companies,  whether  incorporated  or  partner- 
ship, shall  be  included  in  estimating  the  annual  gains,  profits, 
or  income  of  any  person  entitled  to  the  same,  whether  divided 
or  otherwise.  In  estimating  deductions  from  income,  as  afore- 

(333) 


INCOME   TAXATION  (Appdx. 

said,  when  any  person  rents  buildings,  lands,  or  other  property, 
or  hires  labor  to  cultivate  land,  or  to  conduct  any  other  busi- 
ness from  which  such  income  is  actually  derived,  or  pays  in- 
terest upon  any  actual  incumbrance  thereon,  the  amount  actu- 
ally paid  for  such  rent,  labor,  or  interest  shall  be  deducted; 
and  also  the  amount  paid  out  for  usual  or  ordinary  repairs, 
not  exceeding  the  average  paid  out  for  such  purposes  for  the 
preceding  five  year's  shall  be  deducted,  but  no  deduction  shall 
be  made  for  any  amount  paid  out  for  new  buildings,  perma- 
nent improvements,  or  betterments,  made  to  increase  the  value 
of  any  property  or  estate :  Provided,  that  in  cases  where  the 
salary  or  other  compensation  paid  to  any  person  in  the  em- 
ployment or  service  of  the  United  States  shall  not  exceed  the 
rate  of  six  hundred  dollars  per  annum,  or  shall  be  by  fees, 
or  uncertain  or  irregular  in  the  amount  or  in  the  time  during 
which  the  same  shall  have  accrued  or  been  earned,  such  salary 
or  other  compensation  shall  be  included  in  estimating  the  an- 
nual gains,  profits,  or  income  of  the  person  to  whom  the  same 
shall  have  been  paid,  in  such  manner  as  the  commissioner  of 
internal  revenue,  under  the  direction  of  the  Secretary  of  the 
Treasury,  may  prescribe. 

Section  118.  It  shall  be  the  duty  of  all  persons  of  lawful 
age  to  make  and  render  a  list  or  return,  in  such  form  and 
manner  as  may  be  prescribed  by  the  commissioner  of  internal 
revenue,  to  the  assistant  assessor  of  the  district  in  which 
they  reside,  of  the  amount  of  thejr  income,  gains,  and  profits 
as  aforesaid ;  and  all  guardians  and  trustees,  whether  as  ex- 
ecutors, administrators,  or  in  any  other  fiduciary  capacity,  shall 
make  and  render  a  list  or  return,  as  aforesaid,  to  the  as- 
sistant assessor  of  the  district  in  which  such  guardian  or  trus- 
tee resides,  of  the  amount  of  income,  gains,  and  profits  of  any 
minor  or  person  for  whom  they  act  as  guardian  or  trustee; 
and  the  assistant  assessor  shall  require  every  list  or  return 
to  be  verified  by  the  oath  or  affirmation  of  the  party  render- 
ing it,  and  may  increase  the  amount  of  any  list  or  return, 

(334) 


Appdx.)        CIVIL  WAR   INCOME   TAX   ACTS  OF   CONGRESS 

if  he  has  reason  to  believe  that  the  same  is  understated ;  and 
in  case  any  person,  guardian,  or  trustee  shall  neglect  or  re- 
fuse to  make  and  render  such  list  or  return,  or  shall  render 
a  false  or  fraudulent  list  or  return,  it  shall  be  the  duty  of  the 
assessor  or  assistant  assessor  to  make  such  list,  according  to 
the  best  information  he  can  obtain,  by  the  examination  of 
such  person,  and  his  books  and  accounts,  or  any  other  evi- 
dence, and  to  add  twenty-five  per  centum  as  a  penalty  to  the 
amount  of  the  duty  due  on  such  list  in  all  cases  of  wilful 
neglect  or  refusal  to  make  and  render  a  list  or  return,  and, 
in  all  cases  of  a  false  or  fraudulent  return  having  been  ren- 
dered, to  add  one  hundred  per  centum,  as  a  penalty,  to  the 
amount  of  duty  ascertained  to  be  due,  the  duty  and  the  addi- 
tions thereto  as  penalty  to  be  assessed  and  collected  in  the 
manner  provided  for  in  other  cases  of  wilful  neglect  or  re- 
fusal to  render  a  list  or  return,  or  of  rendering  a  false  or 
fraudulent  return :  Provided,  that  any  party,  in  his  or  her 
own  behalf,  or  as  guardian  or  trustee,  shall  be  permitted  to 
declare,  under  oath  or  affirmation,  the  form  and  manner  of 
which  shall  be  prescribed  by  the  commissioner  of  internal 
revenue,  that  he  or  she,  or  his  or  her  ward  or  beneficiary,  was 
not  possessed  of  an  income  of  six  hundred  dollars,  liable  to 
be  assessed  according  to  the  provisions  of  this  act;  or  may 
declare  that  he  or  she  has  been  assessed  and  paid  an  income 
duty  elsewhere  in  the  same  year,  under  the  authority  of  the 
United  States,  upon  his  or  her  gains  and  profits,  as  prescribed 
by  law,  and  if  the  assistant  assessor  shall  be  satisfied  of  the 
truth  of  the  declaration,  shall  thereupon  be  exempt  from  in- 
come duty  in  said  district ;  or  if  the  list  or  return  of  any  party 
shall  have  been  increased  by  the  assistant  assessor,  such  party 
may  exhibit  his  books  and  accounts,  and  be  permitted  to 
prove  and  declare,  under  oath  or  affirmation,  the  amount  of 
annual  income  liable  to  be  assessed ;  but  such  oaths  and  evi- 
dence shall  not  be  considered  as  conclusive  of  the  facts,  and 
no  deductions  claimed  in  such  cases  shall  be  made  or  allowed 

(335) 


INCOME   TAXATION  (Appdx. 

until  approved  by  the  assistant  assessor.  Any  person  feel- 
ing aggrieved  by  the  decision  of  the  assistant  assessor  in  such 
cases  may  appeal  to  the  assessor  of  the  district,  and  his  deci- 
sion thereon,  unless  reversed  by  the  commissioner  of  inter- 
nal revenue,  shall  be  final,  and  the  form,  time,  and  manner 
of  proceedings  shall  be  subject  to  rules  and  regulations  to 
be  prescribed  by  the  commissioner  of  internal  revenue. 

Section  119.  The  duties  on  incomes  herein  imposed  shall 
be  levied  on  the  first  day  of  May,  and  be  due  and  payable  on 
or  before  the  thirtieth  day  of  June,  in  each  year,  until  and  in- 
cluding the  year  eighteen  hundred  and  seventy,  and  no  long- 
er; and  to  any  sum  or  sums  annually  due  and  unpaid  after 
the  thirtieth  of  June,  as  aforesaid,  and  for  ten  days  after 
notice  and  demand  thereof  by  the  collector,  there  shall  be 
levied  in  addition  thereto  the  sum  of  ten  per  centum  on 
the  amount  of  duties  unpaid,  as  a  penalty,  except  from  the 
estates  of  deceased  and  insolvent  persons.  And  if  any  per- 
son liable  to  pay  such  duty  shall  neglect  or  refuse  to  pay  the 
same,  after  such  demand,  the  amount  due  shall  be  a  lien 
in  favor  of  the  United  States  from  the  time  it  was  due  until 
paid,  with  the  interest,  penalties,  and  costs  that  may  accrue 
in  addition  thereto,  upon  all  the  property  and  rights  to  prop- 
erty belonging  to  such  person ;  and  in  default  of  the  pay- 
ment of  the  said  duty  aforesaid,  such  lien  may  be  enforced 
by  distraint  upon  such  property,  rights  to  property,  stocks, 
securities,  and  evidences  of  debt,  by  whomsoever  holden ; 
and  for  this  purpose,  the  collector,  after  demands  duly  giv- 
en, as  aforesaid,  shall  issue  a  warrant,  in  form  and  manner 
to  be  prescribed  by  the  commissioner  of  internal  revenue, 
under  the  directions  of  the  Secretary  of  the  Treasury,  and 
by  virtue  of  such  warrant  there  may  be  levied  on  such  prop- 
erty, rights  to  property,  stocks,  securities,  and  evidences  of 
debt,  a  further  sum,  to  be  fixed  and  stated  in  such  warrant, 
over  and  above  the  said  annual  duty,  interest,  and  penalty  for 
non-payment,  sufficient  for  the  fees,  costs,  and  expenses  of 
(336) 


Appdx.)        CIVIL  WAS.  INCOME   TAX  ACTS   OF  CONQEESS 

such  levy.  And  in  all  cases  of  sale,  as  aforesaid,  the  certifi- 
cate of  such  sale  by  the  collector  shall  vest  in  the  purchaser 
all  right,  title,  and  interest  of  such  delinquent  in  and  to 
such  property,  whether  the  property  be  real  or  personal; 
and  where  the  subject  of  sale  shall  be  stocks,  the  certificate 
of  said  sale  shall  be  lawful  authority  and  notice  to  the  proper 
corporation,  company,  or  association,  to  record  the  same  on 
the  books  or  records,  in  the  same  manner  as  if  transferred  or 
assigned  by  the  person  or  party  holding  the  same,  to  issue 
new  certificates  of  stock  therefor  in  lieu  of  any  original  or 
prior  certificates,  which  shall  be  void  whether  cancelled  or 
not.  And  said  certificates  of  sale  of  the  collector,  when  the 
subject  of  sale  shall  be  securities  or  other  evidences  of  debt, 
shall  be  good  and  valid  receipts  to  the  person  holding  the 
same,  as  against  any  person  holding,  or  claiming  to  hold, 
possession  of  such  securities  or  other  evidences  of  debt. 

Sections  120  and  121.  (These  sections  imposed  a  tax  of 
five  per  cent  on  dividends  declared  by  banks,  trust  companies, 
savings  institutions,  and  insurance  companies,  and  also  the 
same  tax  on  any  undivided  profits  of  such  companies  car- 
ried during  the  year  to  surplus  or  contingent  funds.) 

Section  122.  (This  section  made  a  similar  provision  as  to 
"railroad,  canal,  turnpike,  canal  navigation,,  and  slackwater 
companies,"  in  addition  to  taxing  at  the  same  rate  the  annual 
payments  of  interest  on  their  bonds.) 

Section  123.  There  shall  be  levied,  collected,  and  paid  on 
all  salaries  of  officers,  or  payments  for  services  to  persons 
in  the  civil,  military,  naval,  or  other  employment  or  service 
of  the  United  States,  including  senators  and  representatives 
and  delegates  in  Congress,  when  exceeding  the  rate  of  six 
hundred  dollars  per  annum,  a  duty  of  five  per  centum  on 
the  excess  above  the  said  six  hundred  dollars;  and  it  shall 
be  the  duty  of  all  paymasters,  and  all  disbursing  officers, 
under  the  government  of  the  United  States,  or  in  the  employ 
thereof,  when  making  any  payments  to  officers  and  persons 
BL.INC.TAX.— 22  (337) 


INCOME   TAXATION  (Appdx. 

as  aforesaid,  or  upon  settling  and  adjusting  the  accounts  of 
such  officers  and  persons,  to  deduct  and  withhold  the  afore- 
said duty  of  five  per  centum,  and  [they]  shall,  at  the  same 
time,  make  a  certificate  stating  the  name  of  the  officer  or 
person  from  whom  such  deduction  was  made,  and  the  amount 
thereof,  which  shall  be  transmitted  to  the  office  of  the  com- 
missioner of  internal  revenue,  and  entered  as  part  of  the 
internal  duties;  and  the  pay-roll,  receipts,  or  account  of 
officers  or  persons  paying  such  duty,  as  aforesaid,  shall  be 
made  to  exhibit  the  fact  of  such  payment.  And  it  shall  be  the 
duty  of  the  several  auditors  of  the  Treasury  Department, 
when  auditing  the  accounts  of  any  paymaster  or  disbursing 
officer,  or  when  settling  or  adjusting  the  accounts  of  any  such 
officer,  to  require  evidence  that  the  duties  or  taxes  mentioned 
in  this  section  have  been  deducted  or  paid  over  to  the  com- 
missioner of  internal  revenue :  Provided,  that  payments  of 
prize  money  shall  be  regarded  as  income  from  salaries,  and 
the  duty  thereon  shall  be  adjusted  and  collected  in  like  man- 
ner. 

[NOTE.  For  various  amendments  to  the  foregoing  stat- 
ute, see  Act  Cong.  March  10,  1866,  14  Stat.  4;  Act  Cong. 
July  13,  1866,  14  Stat.  98, 137-139;  Act  Cong.  March  2,  1867, 
14  Stat.  471,  477-480.] 

Act  of  Congress,  July  14,  1870,  c.  255,  16  Stat.  256 

Section  6.  There  shall  be  levied  and  collected  annually, 
as  hereinafter  provided,  for  the  years  eighteen  hundred  and 
seventy  and  eighteen  hundred  and  seventy-one,  and  no  lon- 
ger, a  tax  of  two  and  one-half  per  centum  upon  the  gains, 
profits,  and  income  of  every  person  residing  within  the  United 
States,  and  of  every  citizen  of  the  United  States  residing 
abroad,  derived  from  any  source  whatever,  whether  within  or 
without  the  United  States,  except  as  hereafter  provided,  and 
a  like  tax  annually  upon  the  gains,  profits,  and  income  de- 
(338) 


Appdx.)        CIVIL  WAE  INCOME  TAX   ACTS  Or  CONGRESS 

rived  from  any  business,  trade,  or  profession  carried  on  in 
the  United  States  by  any  person  residing  without  the  United 
States,  and  not  a  citizen  thereof,  or  from  rents  of  real  estate 
within  the  United  States  owned  by  any  person  residing  with- 
out the  United  States,  and  not  a  citizen  thereof. 

Section  7.  In  estimating  the  gains,  profits,  and  income 
of  any  person,  there  shall  be  included  all  income  derived  from 
any  kind  of  property,  rents,  interest  received  or  accrued  upon 
all  notes,  bonds,  and  mortgages,  or  other  forms  of  indebt- 
edness bearing  interest,  whether  paid  or  not,  if  good  and 
collectable,  interest  upon  notes,  bonds,  or  other  securities 
of  the  United  States ;  and  the  amount  of  all  premium  on  gold 
and  coupons ;  the  gains,  profits,  and  income  of  any  business, 
profession,  trade,  employment,  office,  or  vocation,  including 
any  amount  received  as  salary  or  pay  for  services  in  the  civil, 
military,  naval,  or  other  service  of  the  United  States,  or  as 
senator,  representative,  or  delegate  in  Congress,  except  that 
portion  thereof  from  which,  under  authority  of  acts  of  Con- 
gress previous  hereto,  a  tax  of  five  per  centum  shall  have 
been  withheld ;  the  share  of  any  person  of  the  gains  and 
profits,  whether  divided  or  not,  of  all  companies  or  partner- 
ships, but  not  including  the  amount  received  from  any  corpo- 
rations whose  officers,  as  authorized  by  law,  withhold  and  pay 
as  taxes  a  per  centum  of  the  dividends  made,  and  of  interest 
or  coupons  paid  by  such  corporations ;  profits  realized  within 
the  year  from  sales  of  real  estate  purchased  within  two  years 
previous  to  the  year  for  which  income  is  estimated;  the 
amount  of  sales  of  live  stock,  sugar,  wool,  butter,  cheese,  pork, 
beef,  mutton,  or  other  meats,  hay  and  grain,  fruits,  vegetables, 
or  other  productions,  being  the  growth  or  produce  of  the  es- 
tate of  such  person,  but  not  including  any  part  thereof  con- 
sumed directly  by  the  family;  and  all  other  gains,  profits, 
and  income  drawn  from  any  source  whatever,  but  not  includ- 
ing the  rental  value  of  the  homestead  used  or  occupied  by  any 
person  or  by  his  family. 

(339) 


INCOME    TAXATION  (Appdx. 

Section  8.  Military  or  naval  pensions  allowed  to  any  per- 
son under  the  laws  of  the  United  States,  and  the  sum  of  two 
thousand  dollars  of  the  gains,  profits,  and  income  of  any 
person,  shall  be  exempt  from  said  income  tax,  in  the  man- 
ner hereinafter  provided.  Only  one  deduction  of  two 
thousand  dollars  shall  be  made  from  the  aggregate  income 
of  all  members  of  any  family  composed  of  one  or  both  par- 
ents and  one  or  more  minor  children,  or  of  husband  and 
wife;  but  when  a  wife  has  by  law  a  separate  income,  be- 
yond the  control  of  her  husband,  and  is  living  separate 
and  apart  from  him,  such  deduction  shall  then  be  made 
from  her  income,  gains,  and  profits ;  and  guardians  and 
trustees  shall  be  allowed  to  make  the  deduction  in  favor  of 
each  ward  or  beneficiary,  except  that  in  a  case  of  two  or 
more  wards  or  beneficiaries  comprised  in  one  family,  hav- 
ing joint  property  interest,  only  one  deduction  shall  be 
made  in  their  favor.  For  the  purpose  of  allowing  such  de- 
duction from  the  income  of  any  religious  or  social  com- 
munity holding  all  their  property  and  the  income  thereof 
jointly  and  in  common,  each  five  of  the  persons  composing 
such  society,  and  any  remaining  fractional  number  of  such 
persons  less  than  five  over  such  groups  of  five,  shall  be  held  to 
constitute  a  family,  and  a  deduction  of  two  thousand  dol- 
lars shall  be  allowed  for  each  of  such  families.  Any  taxes 
on  the  incomes,  gains,  and  profits  of  such  societies  now 
due  and  unpaid,  shall  be  assessed  and  collected  according 
to  this  provision,  except  that  the  deduction  shall  be  only 
one  thousand  dollars  for  any  year  prior  to  eighteen  hun- 
dred and  seventy. 

Section  9.  In  addition  to  the  exemptions  provided  in  the 
preceding  section,  there  shall  be  deducted  from  the  gains, 
profits,  and  income  of  any.  person  all  national,  state,  county, 
and  municipal  taxes  paid  by  him  within  the  year,  whether  such 
person  be  owner,  tenant,  or  mortgager ;  all  his  losses  actually 
sustained  during  the  year  arising  from  fires,  floods,  shipwreck, 

(340) 


Appdx.)        CIVIL   WAB   INCOME   TAX   ACTS   OF   CONGBESS 

or  incurred  in  trade,  and  debts  ascertained  to  be  worthless,  but 
excluding  all  estimated  depreciation  of  values;  the  amount 
of  interest  paid  during  the  year,  and  the  amount  paid  for  rent 
or  labor  to  cultivate  land,  or  to  conduct  any  other  business 
from  which  income  is  derived ;  the  amount  paid  for  the  rent 
of  the  house  or  premises  occupied  as  a  residence  for  himself 
or  his  family,  and  the  amount  paid  out  for  usual  and  ordinary 
repairs.  No  deduction  shall  be  made  for  any  amount  paid  out 
for  new  buildings,  permanent  improvements,  or  betterments 
made  to  increase  the  value  of  any  property  or  estate. 

Section  10.  The  tax  hereinbefore  provided  shall  be  as- 
sessed upon  the  gains,  profits,  and  income  for  the  year  ending 
on  the  thirty-first  day  of  December  next  preceding  the  time 
for  levying  and  collecting  said  tax,  and  shall  be  levied  on  the 
first  day  of  March,  eighteen  hundred  and  seventy-one,  and 
eighteen  hundred  and  seventy-two,  and  be  due  and  payable  on 
or  before  the  thirtieth  day  of  April  in  each  of  said  years.  And 
in  addition  to  any  sum  annually  due  and  unpaid  after  the  thir- 
tieth day  of  April,  and  for  ten  days  after  notice  and  demand 
therefor  by  the  collector,  there  shall  be  levied  and  collected, 
as  a  penalty,  the  sum  of  five  per  centum  on  the  amount  unpaid, 
and  interest  on  said  amount  at  the  rate  of  one  per  centum 
per  month  from  the  time  the  same  became  due,  except  from 
the  estates  of  deceased,  insane,  or  insolvent  persons. 

Section  11.  It  shall  be  the  duty  of  every  person  of  lawful 
age,  whose  gross  income  during  the  preceding  year  exceeded 
two  thousand  dollars,  to  make  and  render  a  return  on  or  be- 
fore the  day  designated  by  law,  to  the  assistant  assessor  of  the 
district  in  which  he  resides  of  the  gross  amount  of  his  income, 
gains,  and  profits  as  aforesaid;  but  not  including  the  amount 
received  from  any  corporation  whose  officers,  as  authorized  by 
law,  withhold  and  pay  as  taxes  a  per  centum  of  the  dividends 
made  and  of  the  interest  or  coupons  paid  by  such  corporations, 
nor  that  portion  of  the  salary  or  pay  received  for  services  in 

(341) 


INCOME   TAXATION  (Appdx. 

the  civil,  military,  naval,  or  other  service  of  the  United  States, 
or  as  senator,  representative,  or  delegate  in  Congress,  from 
which  tax  has  been  deducted,  nor  the  wages  of  minor  children 
not  received ;  and  every  guardian  and  trustee,  executor  or  ad- 
ministrator, and  any  person  acting  in  any  other  fiduciary  ca- 
pacity, or  as  resident  agent  for,  or  copartner  of,  any  non-resi- 
dent alien,  deriving  income,  gains,  and  profits  from  any  busi- 
ness, trade,  or  profession  carried  on  in  the  United  States,  or 
from  rents  of  real  estate  situated  therein,  shall  make  and  ren- 
der a  return  as  aforesaid  to  the  assistant  assessor  of  the  dis- 
trict in  which  he  resides  of  the  amount  of  income,  gains,  and 
profits  of  any  minor  or  person  for  whom  he  acts.  The  as- 
sistant assessor  shall  require  every  such  return  to  be  verified 
by  the  oath  of  the  party  rendering  it,  and  may  increase  the 
amount  of  any  return,  after  notice  to  such  party,  if  he  has 
reason  to  believe  that  the  same  is  understated.  In  case  any 
person  having  a  gross  income  as  above,  of  two  thousand  dol- 
lars or  more,  shall  neglect  or  refuse  to  make  and  render  such 
return,  or  shall  render  a  false  or  fraudulent  return,  the  as- 
sessor or  the  assistant  assessor  shall  make  such  return,  accord- 
ing to  the  best  information  he  can  obtain  by  the  examination 
of  said  person,  or  of  his  books  or  accounts,  or  by  any  other 
evidence,  and  shall  add,  as  a  penalty,  to  the  amount  of  the 
tax  due  thereon,  fifty  per  centum  in  all  cases  of  willful  neglect 
or  refusal  to  make  and  render  a  return,  and-  one  hundred  per 
centum  in  all  cases  of  a  false  or  fraudulent  return  having  been 
rendered.  The  tax  and  the  addition  thereto  as  penalty  shall  be 
assessed  and  collected  in  the  manner  provided  for  in  cases  of 
willful  neglect  or  refusal  to  render  a  return,  or  of  rendering 
a  false  or  fraudulent  return.  But  no  penalty  shall  be  assessed 
upon  any  person  for  such  neglect  or  refusal,  or  for  making  or 
rendering  a  false  or  fraudulent  return,  except  after  reasonable 
notice  of  the  time  and  place  of  hearing,  to  be  regulated  by  the 
commissioner  of  internal  revenue,  so  as  to  give  the  person 
(342) 


Appdx.)        CIVIL  WAR   INCOME   TAX   ACTS   OF   CONGBES8 

charged  an  opportunity  to  be  heard:  Provided  that  no  col- 
lector, deputy  collector,  assessor,  or  assistant  assessor  shall 
permit  to  be  published  in  any  manner  such  income  returns,  or 
any  part  thereof,  except  such  general  statistics,  not  specifying 
the  names  of  individuals  or  firms,  as  he  may  make  public,  un- 
der such  rules  and  regulations  as  the  commissioner  of  internal 
revenue  shall  prescribe. 

Section  12.  When  the  return  of  any  person  is  increased 
by  the  assistant  assessor,  such  person  may  exhibit  his  books 
and  accounts  and  be  permitted  to  prove  and  declare,  under 
oath,  the  amount  of  income  liable  to  be  assessed;  but  such 
oath  and  evidence  shall  not  be  conclusive  of  the  facts,  and  no 
deductions  claimed  in  such  case  shall  be  allowed  until  approved 
by  the  assistant  assessor.  Any  person  may  appeal  from  the 
decision  of  the  assistant  assessor,  in  such  cases,  to  the  assessor 
of  the  district,  and  his  decision  thereon,  unless  reversed  by  the 
commissioner  of  internal  revenue,  shall  be  final.  The  form, 
time,  and  manner  of  proceedings  shall  be  subject  to  regulations 
to  be  prescribed  by  the  commissioner  of  internal  revenue. 

Section  13.  Any  person  in  his  own  behalf,  or  as  such  fidu- 
ciary or  agent,  shall  be  permitted  to  declare,  under  oath,  that 
he,  or  his  ward,  beneficiary,  or  principal,  was  not  possessed  of 
an  income  of  two  thousand  dollars,  liable  to  be  assessed  ac- 
cording to  the  provisions  of  this  act ;  or  may  declare  that  an 
.  income  tax  has  been  assessed  and  paid  elsewhere  in  the  same 
year,  under  authority  of  the  United  States,  upon  his  income, 
gains,  and  profits,  or  those  of  his  ward,  beneficiary,  or  prin- 
cipal, as  required  by  law;  and  if  the  assistant  assessor  shall 
be  satisfied  of  the  truth  of  the  declaration,  such  person  shall 
thereupon  be  exempt  from  income  tax  in  said  district. 

Section  14.  Consuls  of  foreign  governments  who  are  not 
citizens  of  the  United  States  shall  be  exempt  from  any  income 
tax  imposed  by  this  act  which  may  be  derived  from  their  offi- 
cial emoluments,  or.  from  property  in  foreign  countries :  Pro- 

(343) 


INCOME   TAXATION  (Appdx. 

vided  that  the  governments  which  such  consuls  may  represent 
shall  extend  similar  exemptions  to  consuls  of  the  United  States. 
Section  15.  There  shall  be  levied  and  collected  for  and 
during  the  year  eighteen  hundred  and  seventy-one  a  tax  of 
two  and  one-half  per  centum  on  the  amount  of  all  interest 
or  coupons  paid  on  bonds  or  other  evidences  of  debt  issued 
and  payable  in  one  or  more  years  after  date,  by  any  of  the 
corporations  in  this  section  hereinafter  enumerated,  and  on 
the  amount  of  all  dividends  of  earnings,  income,  or  gains  here- 
after declared,  by  any  bank,  trust  company,  savings  institu- 
tion, insurance  company,  railroad  company,  canal  company, 
turnpike  company,  canal  navigation  company,  and  slack-water 
company,  whenever  and  wherever  the  same  shall  be  payable, 
and  to  whatsoever  person  the  same  may  be  due,  including  non- 
residents, whether  citizens  or  aliens,  and  on  all  undivided 
profits  of  any  such  corporation  which  have  accrued  and  been 
earned  and  added  to  any  surplus,  contingent,  or  other  fund, 
and  every  such  corporation  having  paid  the  tax  as  aforesaid, 
is  hereby  authorized  to  deduct  and  withhold  from  any  pay- 
ment on  account  of  interest,  coupons,  and  dividends  an  amount 
equal  to  the  tax  of  two  and  one-half  per  centum  on  the  same ; 
and  the  payment  to  the  United  States,  as  provided  by  law, 
of  the  amount  of  tax  so  deducted  from  the  interest,  coupons, 
and  dividends  aforesaid,  shall  discharge  the  corporation  from 
any  liability  for  that  amount  of  said  interest,  coupons,  or 
dividends,  claimed  as  due  to  any  person,  except  in  cases  where 
said  corporations  have  provided  otherwise  by  an  express  con- 
tract: Provided,  that  the  tax  upon  the  dividends  of  insur- 
ance companies  shall  not  be  deemed  due  until  such  dividends 
are  payable,  either  in  money  or  otherwise ;  and  that  the  money 
returned  by  mutual  insurance  companies  to  their  policy  hold- 
ers, and  the  annual  or  semi-annual  interest  allowed  or  paid 
to  the  depositors  in  savings  banks  and  savings  institutions, 
shall  not  be  considered  as  dividends ;  and  that  when  any  divi- 
dend is  made,  or  interest  as  aforesaid  is  paid,  which  includes 

(344) 


Appdx.)        CIVIL    WAR  INCOME   TAX   ACTS   OF   CONGRESS 

any  part  of  the  surplus  or  contingent  fund  of  any  corporation 
which  has  been  assessed  and  the  tax  paid  thereon,  or  which 
includes  any  part  of  the  dividends,  interest,  or  coupons  re- 
ceived from  other  corporations  whose  officers  are  authorized 
by  law  to  withhold  a  per  centum  on  the  same,  the  amount 
of  tax  so  paid  on  that  portion  of  the  surplus  or  contingent 
fund,  and  the  amount  of  tax  which  has  been  withheld  and 
paid  on  dividends,  interest,  or  coupons  so  received,  may  be 
deducted  from  the  tax  on  such  dividend  or  interest. 

Section  16.  Every  person  having  the  care  or  management 
of  any  corporation  liable  to  be  taxed  under  the  last  preceding 
section  shall  make  and  render  to  the  assessor  or  assistant 
assessor  of  the  district  in  which  such  person  has  his  office 
for  conducting  the  business  of  such  corporation,  on  or  before 
the  tenth  day  of  the  month  following  that  in  which  any  divi- 
dends or  sums  of  money  become  due  or  payable  as  aforesaid, 
a  true  and  complete  return  in  such  form  as  the  commissioner 
of  internal  revenue  may  prescribe,  of  the  amount  of  income 
and  profits  and  of  taxes  as  aforesaid ;  and  there  shall  be  an- 
nexed thereto  a  declaration  of  the  president,  cashier,  or  treas- 
urer of  the  corporation,  under  oath,  that  the  same  contains 
a  true  and  complete  account  of  the  income  and  profits  and  of 
taxes  as  aforesaid.  And  for  any  default  in  the  making  or 
rendering  of  such  return,  with  such  declaration  annexed,  the 
corporation  so  in  default  shall  forfeit,  as  a  penalty,  the  sum 
of  one  thousand  dollars ;  and  in  case  of  any  default  in  mak- 
ing or  rendering  said  return,  or  of  any  default  in  the  payment 
of  the  tax  as  required,  or  of  any  part  thereof,  the  assessment 
and  collection  of  the  tax  and  penalty  shall  be  in  accordance 
with  the  general  provisions  of  law  in  other  cases  of  neglect 
and  refusal. 

(345) 


INCOME    TAXATION  (Appdx. 


THE  WISCONSIN  INCOME-TAX  LAW  OF  1911 

Laws  of  Wisconsin  1911,  c.  658,  page  984,  July  15,  1911 

Section  1.  There  are  added  to  the  statutes  thirty  new  sec- 
tions to  read:  Section  1087m — 1.  There  shall  be  assessed, 
levied,  collected,  and  paid  a  tax  upon  incomes  received  during 
the  year  ending  December  31,  1911,  and  upon  incomes  received 
annually  thereafter,  by  such  persons  and  from  such  sources 
as  hereinafter  described ;  provided,  that  firms,  copartnerships, 
corporations,  joint  stock  companies  and  associations  which 
customarily  close  their  annual  accounts  on  a  date  other  than 
December  31,  or  which  customarily  estimate  their  income  or 
profits  on  a  basis  other  than  that  of  actual  cash  receipts  and 
disbursements,  may,  with  the  consent  and  approval  of  the 
tax  commission,  return  for  assessment  and  taxation  the  in- 
come or  profits  earned  during  the  business  year  for  which  the 
accounts  of  such  person  are  customarily  made  up. 

Section  1087m — 2.  1.  The  term  "person,"  as  used  in  this 
act,  shall  mean  and  include  any  individual,  firm,  copartnership, 
and  every  corporation,  joint  stock  company  or  association  or- 
ganized for  profit  and  having  a  capital  stock  represented  by 
shares,  unless  otherwise  expressly  stated. 

2.  The  term  "income,"  as  used  in  this  act,  shall  include : 

(a)  All  rent  of  real  estate,  including  the  estimated  rental 
of  residence  property  occupied  by  the  owner  thereof. 

(b)  All  interest  derived  from  money  loaned  or  invested  in 
notes,  mortgages,  bonds  or  other  evidences  of  debt  of  any 
kind  whatsoever. 

(c)  All  wages,  salaries  or  fees  derived  from  services;  pro- 
vided that  compensation  to  public  officers  for  public  service 
shall  not  be  computed  as  a  part  of  the  taxable  income  in  such 
cases  where  the  taxation  thereof  would  be  repugnant  to  the 
constitution. 

(346) 


Appdx.)  WISCONSIN   INCOME-TAX   LAW   OF    1911 

(d)  All  dividends  or  profits  derived  from  stock  or  from  the 
purchase  and  sale  of  any  property  or  other  valuable  acquired 
within  three  years  previous  or  from  any  business  whatever. 

(e)  All  royalties  derived  from  the  possession  or  use  of  fran- 
chises or  legalized  privileges  of  any  kind. 

(f)  And  all  other  income  of  any  kind  derived  from  any 
source  whatever  except  such  as  is  hereinafter  exempted. 

3.  The  tax  shall  be  assessed,  levied,  and  collected  upon  all 
income,  not  hereinafter  exempted,  received  by  every  person 
residing  within  the  state,  and  by  every  non-resident  of  the 
state  upon  such  income  as  is  derived  from  sources  within  the 
state  or  within  its  jurisdiction.  So  much  of  the  income  of 
any  person  residing  within  the  state  as  is  derived  from  rentals, 
stocks,  bonds,  securities  or  evidences  of  indebtedness  shall  be 
assessed  and  taxed,  whether  such  income  is  derived  from 
sources  within  or  without  the  state ;  provided,  that  any  person 
engaged  in  business  within  and  without  the  state  shall,  with 
respect  to  income  other  than  that  derived  from  rentals,  stocks, 
bonds,  securities  or  evidences  of  indebtedness,  be  taxed  only 
upon  that  proportion  of  such  income  as  is  derived  from  busi- 
ness transactions  and  property  located  within  [the]  state, 
which  shall  be  determined  in  the  manner  specified  is  [in]  sub- 
division (e)  of  section  1770b,  as  far  as  applicable. 

Section  1087m — 3.  Every  corporation,  joint  stock  com- 
pany or  association  shall  be  allowed  to  make  from  its  gross  in- 
come the  following  deductions : 

(a)  Payments  made  within  the  year  for  personal  services  of 
officers  and  employes  actually  employed  in  the  production  of 
such  income;  provided,  there  be  reported  the  name,  address, 
and  amount  paid  each  such  officer  or  employe  to  whom  a  com- 
pensation of  seven  hundred  dollars  or  more  shall  have  been 
paid  during  the  assessment  year. 

(b)  Other  ordinary  and  necessary  expenses  actually  paid 
within  the  year  out  of  income  in  the  maintenance  and  opera- 
tion of  its  business  and  property,  including  a  reasonable  allow- 

(347) 


INCOME   TAXATION  (Appdx. 

ance  for  depreciation  of  property  from  which  the  income  is 
derived.  All  bonds  issued  by  a  corporation  shall  be  deemed  an 
interest  in  the  property  and  business  of  such  corporation ;  and 
so  much  of  the  interest  payable  on  such  bonds  as  is  represent- 
ed by  the  ratio  between  the  property  located  and  business 
transacted  within  this  state  to  he  [the]  total  property  and 
business  of  such  corporation  as  provided  in  subdivision  3,  of 
section  1087m — 2,  shall  be  subject  to  taxation  under  this  act 
at  the  same  rate  as  the  income  of  such  corporation.  Such  tax 
shall  be  assessed  to  the  bondholders  under  the  general  desig- 
nation "The  Bondholders  of "  (inserting  the  name  of  the 

corporation),  but  shall  be  a  lien  upon  the  property  and  business 
of  such  corporation  prior  to  all  other  liens,  and  unless  paid  by 
the  bondholders  shall  be  enforced  against  the  corporation. 
When  paid  by  the  corporation  the  amount  of  such  tax  may  be 
deducted  from  the  next  interest  payment  on  such  bonds,  un- 
less otherwise  provided  by  contract. 

(c)  Losses  actually  sustained  within  the  year  and  not  com- 
pensated for  by  insurance  or  otherwise. 

(d)  Sums  paid  by  such  person  within  the  year  for  taxes  im- 
posed by  any  state  of  this  union  or  subdivision  thereof,  or  any 
territory  or  possession  of  the  United  States,  upon  the  source 
from  which  the  income  taxed  by  this  act  is  derived. 

(e)  Dividends   or  income   received   within   the   year    from 
stocks  or  interest  in  any  firm,  copartnership  or  corporation, 
joint  stock  company  or  association,  the  income  of  which  shall 
have  been  assessed  under  the  provisions  of  this  act;  provided, 
such  firm,  copartnership,  corporation,  joint  stock  company  or 
association  report  at  the  time  of  assessment  the  name  and 
address  of  each  such  person  owning  stocks  or  interest  in  the 
same  and  the  amount  of  dividends  or  income  paid  such  person 
during  the  assessment  year. 

(f)  Interest  received  from  bonds  or  other  securities  exempt 
from  taxation  under  the  laws  of  the  United  States. 

(348) 


Appdx.)  WISCONSIN   INCOME-TAX  LAW   OF    1911 

Section  1087m — 4.  Persons  other  than  corporations,  joint 
stock  companies  or  associations,  in  reporting  incomes  for  pur- 
poses of  taxation  shall  be  allowed  the  following  deductions : 

(a)  The   ordinary   and    necessary   expenses    actually    paid 
within  the  year  in  carrying  on  the  profession,  occupation,  or 
business  from  which  the  income  is  derived,  including  a  rea- 
sonable allowance  for  depreciation  of  the  property  from  which 
the  income  is  derived.     But  no  deductions  shall  be  made  for 
any  amount  paid  for  personal  services  unless  these  be  report- 
ed, the  name,  address,  and  the  amount  paid  each  such  em- 
ploye to  whom  a  compensation  of  seven  hundred  dollars  or 
more  shall  have  been  paid  during  the  assessment  year. 

(b)  Losses  during  the  year  and  not  compensated  for  by  in- 
surance or  otherwise. 

(c)  Dividends    or   incomes   received   by   any    person    from 
stocks,  or  interest  in  any  firm,  copartnership,  corporation,  joint 
stock  company  or  association,  the  income  of  which  shall  have 
been  assessed  under  the  provisions  of  this  act;  provided,  such 
firm,  copartnership,  corporation,  joint  stock  company  or  as- 
sociation report  at  the  time  of  assessment  the  name  and  ad- 
dress of  each  such  person  owning  stock  or  interest  in  the  same 
and  the  amount  of  dividends  or  income  paid  such  person  dur- 
ing the  assessment  year. 

(d)  Interest  paid  within  the  year  on  existing  indebtedness; 
provided,  the  debtor  reports  the  amount  so  paid,  the  form  of 
the  indebtedness,  together  with  the  name  and  address  of  the 
creditor. 

(e)  Interest  received  from  bonds  or  other  securities  exempt 
from  taxation  under  the  laws  of  the  United  States. 

(f)  Salaries  or  other  compensation  received  from  the  Unit- 
ed States  by  officials  thereof. 

(g)  Pensions  received  from  the  United  States. 

(h)  Taxes  paid  by  such  persons  during  the  year  other  than 
inheritance  taxes  upon  the  property  or  business  from  which 
the  income  hereby  taxed  is  derived. 

(349) 


INCOME   TAXATION  (Appdx. 

(1)  All  inheritances,   devises  and  bequests  received  during 
the  year  upon  which  an  inheritance  tax  shall  have  been  paid 
to  this  state. 

(j)  Insurance  to  the  total  amount  of  ten  thousand  dollars 
received  by  any  person  or  persons  legally  dependent  upon  the 
decedent,  in  payment  of  a  death  claim  by  any  insurance  com- 
pany, fraternal  benefit  society  or  other  insurer. 

Section  1087m — 5.  1.  There  shall  be  exempt  from  tax- 
ation under  this  act  income  as  follows,  to-wit : 

(a)  To  an  individual,  income  up  to  and  including  eight 
hundred  dollars. 

(b)  To  husband  and  wife,  twelve  hundred  dollars. 

(c)  For  each  child  under  the  age  of  eighteen  years,  two 
•hundred  dollars. 

(d)  For  each  additional  person,  for  whose  support  the 
taxpayer  is  legally  liable  and  who  is  entirely  dependent  up- 
on the  taxpayer  for  his  support,  two  hundred  dollars. 

(e)  The  aforesaid  exemptions  shall  not  apply  to  incomes 
derived   from   sources   within   the   state   by   non-residents 
thereof,    nor   to   firms,   copartnerships,   corporations,   joint 
stock  companies  nor  associations.     In  computing  said  ex- 
.emptions  and  the  amount  of  taxes  payable  under  section 

1087m — 7  of  this  act,  the  income  of  a  wife  shall  be  added  to 
the  income  of  her  husband,  and  the  income  of  each  child 
under  eighteen  years  of  age  to  that  of  its  parent  or  par- 
ents, when  said  wife  or  child  is  not  living  separately  from 
'said  husband,  parent  or  parents. 

(2)  Income  of  any  mutual  savings  or  loan  and  building 
association,   or  of    any   religious,   scientific,   educational,   be- 
nevolent,  or  other  association  of  individuals  not  organized 
or  conducted  for  pecuniary  profit. 

(3)  Incomes   derived  from  property  and   privileges   by 
persons  now  required  by  law  to  pay  taxes  or  license  fees 
directly  into  the  treasury  of  the  state  in  lieu  of  taxes,  and 

(350) 


Appdx.)  WISCONSIN  INCOME-TAX  LAW   OF    1911 

such  persons  shall  continue  to  pay  taxes  and  license  fees 
as  heretofore. 

(4)  Incomes  received  by  the  United  States,  the  state, 
and  all  counties,  cities,  villages,  school  districts  or  other 
political  units  of  the  state. 

Section  1087m — 6.  1.  The  tax  to  be  assessed,  levied, 
and  collected  upon  the  incomes  of  all  persons,  except  as 
otherwise  provided  by  law,  after  making  such  deductions 
and  exemptions  as  are  hereinbefore  allowed,  shall  be  com- 
puted at  the  following  rates,  to-wit: 

(a)  On  the  first  one  thousand  dollars  of  taxable  income 
or  any  part  thereof,  at  the  rate  of  one  per  cent. 

(b)  On  the   second   one  thousand   dollars   or  any   part 
thereof,  one  and  one-fourth  per  cent. 

(c)  On  the  third  one  thousand  dollars  or  any  part  there- 
of, one  and  one-half  per  cent. 

(d)  On  the  fourth  one  thousand  dollars  or  any  part  there- 
of, one  and  three-fourths  per  cent. 

(e)  On  the  fifth  one  thousand  dollars  or  any  part  there- 
of, two  per  cent. 

(f)  On  the  sixth  one  thousand  dollars  or  any  part  there- 
of, two  and  one-half  per  cent. 

(g)  On  the   seventh  one  thousand  dollars  or  any  part 
thereof,  three  per  cent. 

(h)  On  the  eighth  one  thousand  dollars  or  any  part 
thereof,  three  and  one-half  per  cent. 

(i)  On  the  ninth  one  thousand  dollars  or  any  part  there- 
of, four  per  cent. 

(j)  On  the  tenth  one  thousand  dollars  or  any  part  there- 
of, four  and  one-half  per  cent. 

(k)  On  the  eleventh  one  thousand  dollars  or  any  part 
thereof,  five  per  cent. 

(1)  On  the  twelfth  one  thousand  dollars  or  any  part  there- 
of, five  and  one-half  per  cent. 

(351) 


INCOME   TAXATION  (Appdx. 

(m)  On  any  sum  of  taxable  income  in  excess  of  twelve 
thousand  dollars,  six  per  cent. 

2.  Providing,  however,  that  the  tax  to  be  assessed,  levied, 
and  collected  upon  the  incomes  of  corporations,  joint  stock 
companies  or  associations,  after  making  due  allowance  for 
deductions  as  hereinbefore  provided,  shall  be  computed  at 
the  following  rates  to-wit : 

(a)  If  the  taxable  income  equals  one  per  cent  or  less  of 
the  assessed  value  of  the  property  used  and  employed  in  the 
acquisition  of  such  income,  the  rate  of  tax  shall  be  one  half 
of  one  per  cent  of  such  income. 

(b)  If  the  taxable  income  equals  more  than  one,  but  does 
not  exceed  two  per  cent  of  the  assessed  value  of  the  proper- 
ty used  and  employed  in  the  acquisition  of  such  income,  the 
rate  of  tax  shall  be  one  per  cent  of  such  income. 

(c)  If  the  taxable  income  equals  more  than  two,  but  does 
not  exceed  three  per  cent  of  the  assessed  value  of  the  prop- 
erty used  and  employed  in  the  acquisition  of  such  income, 
the  rate  of  tax  shall  be  one  and  one-half  per  cent  of  such 
income. 

(d)  If  the  taxable  income  equals  more  than  three,  but 
does  not  exceed  four  per  cent  of  the  assessed  value  of  the 
property  used  and  employed  in  the  acquisition  of  such  in- 
come, the  rate  of  the  tax  shall  be  two  per  cent  of  such  in- 
come. 

(e)  If  the  taxable  income  equals  more  than  four,  but  does 
not  exceed  five  per  cent  of  the  assessed  value  of  the  proper- 
ty used  and  employed  in  the  acquisition  of  such  income,  the 
rate  of  the  tax  shall  be  two  and  one-half  per  cent  of  such 
income. 

(f)  If  the  taxable  income  equals  more  than  five,  but  does 
not  exceed  six  per  cent  of  the  assessed  value  of  the  property 
used  and  employed  in  the  acquisition  of  such  income,  the 
rate  of  the  tax  shall  be  three  per  cent  of  such  income. 

(352) 


Appdx.)  WISCONSIN   INCOME-TAX   LAW   OF    1911 

(g)  And  in  like  manner  the  tax  upon  the  taxable  income 
shall  continue  to  increase  at  the  rate  of  one-half  of  one  per 
cent  for  each  additional  one  per  cent  or  fractional  part  there- 
of that  the  taxable  income  bears  to  the  assessed  value  of 
the  property  used  and  employed  in  the  acquisition  of  such 
income,  until  the  rate  of  profits  equals  twelve  per  cent  of 
such  assessed  value  of  the  property  used  and  employed  in 
the  acquisition  of  such  income,  when  such  rate  shall  con- 
tinue as  a  proportional  rate  of  six  per  cent  of  such  taxable 
income. 

Section  1087m — 7.  The  legislature  intends  subsection  2, 
of  section  1087m — 6  of  this  act,  to  be  a  separable  part  there- 
of, so  that  said  subsection  may  fail  or  be  declared  invalid 
without  adversely  affecting  any  other  part  of  the  act :  pro- 
vided that  in  event  of  its  failing  or  being  declared  invalid 
the  incomes  of  corporations,  joint  stock  companies  and  as- 
sociations shall  be  subject  and  shall  be  construed  to  have 
been  subject  to  taxation  at  the  rates  specified  in  subsection 
1,  of  section  1087m — 6,  and  said  incomes  shall  be  reassess- 
ed by  the  tax  commission  and  taxed  for  the  years  for  which 
the  rates  provided  in  subsection  2  of  section  1087m — 6,  shall 
have  failed. 

Section  1087m — 8.  1.  The  state  shall  be  divided  into 
assessment  districts  by  the  state  tax  commission,  but  in  no 
instance  shall  a  county  be  divided. 

2.  Not  less  than  thirty  days  prior  to  the  first  of  March, 
1912,  there  shall  be  selected  and  appointed  by  the  state  tax 
commission  an  assessor  of  incomes  for  each  assessment  dis- 
trict in  the  state,  who  shall  hold  office  for  the  term  of  three 
years  unless  sooner  removed  as  hereinafter  provided.  Such 
assessor  shall  be  a  citizen  and  an  elector  of  this  state,  but 
need  not  be  a  resident  of  the  district  in  which  he  is  appoint- 
ed to  serve ;  provided,  however,  that  so  far  as  practicable 
preference  shall  be  given  in  making  such  appointments  to 
residents  of  the  districts. 

BL.INC.TAX.— 23  (353) 


INCOME   TAXATION  (Appdx. 

3.  The  tax  commission  may  in  its  discretion  transfer  any 
assessor  of  incomes  from  one  district  to  another  and  may 
remove  any  assessor  of  incomes  or  his  deputy  from  office. 

4.  Before  entering  upon  his  duties  such  assessor  of  in- 
comes shall  subscribe  to  the  constitutional  oath  and  file  the 
same  in  the  office  of  the  secretary  of  state. 

5.  The  state  tax  commission  may  authorize  any  assessor 
of  incomes  to  appoint  such  deputies  and  other  assistants  as 
may  be  required  for  the  proper  performance  of  his  duties. 
Such  deputies  shall  qualify  in  like  manner  and  possess  the 
same  powers  as  the  assessor. 

Section  1087m — 9.  The  salaries  of  the  assessors  of  in- 
comes and  their  deputies  and  assistants  shall  be  fixed  by 
the  state  tax  commission,  but  such  salaries,  together  with 
the  expenses  of  such  assessors  and  their  deputies  and  as- 
sistants shall  not  in  any  year  exceed  in  amount  five  cents 
for  every  thousand  dollars  of  the  valuation  of  all  property 
as  fixed  by  the  tax  commission  in  the  state  assessment  of 
the  preceding  year.  The  assessor  shall  be  furnished  all 
necessary  printing,  stationery  and  postage,  and  he  and  his 
deputies  shall  be  entitled  to  receive  their  actual  necessary 
expenses  while  traveling  in  the  performance  of  their  duties. 
The  salaries  of  the  assessor  and  his  assistants,  and  all  such 
expenditures  shall  be  audited  and  paid  out  of  the  state 
treasury  in  the  same  manner  as  other  similar  salaries  and 
state  expenses  are  audited  and  paid. 

Section  1087m — 10.  1.  The  state  tax  commission  and  the 
assessors  of  incomes  shall  annually  on  the  first  day  of  Jan- 
uary, or  as  soon  thereafter  as  practicable,  proceed  to  assess 
as  hereinafter  provided  every  income  received  during  the 
preceding  calendar  year  liable  to  taxation  under  the  provi- 
sions of  this  act.  The  assessment  of  corporations,  joint 
stock  companies  and  associations  shall  be  made  by  the  state 
tax  commission,  and  the  assessment  of  persons,  other  than 

(354) 


Appdx.)  WISCONSIN   INCOME-TAX   LAW   OF    1911 

corporations,  joint  stock  companies  and  associations  shall 
be  by  the  county  assessor  of  incomes. 

2.  In  the  performance  of  such  duty  the  state  tax  commis- 
sion and  the  county  assessors  of  incomes  shall  respectively 
possess  all  powers  now  or  hereafter  granted  by  law  to  the 
state  tax  commission  or  assessors  in  the  assessment  of  per- 
sonal property  and  also  the  power  to  estimate  incomes. 

3.  Every  corporation,  joint  stock  company  or  association, 
whether  taxable  under  this  act  or  not,  shall  furnish  to  the 
tax  commission  a  true  and  accurate  statement  at  such  time, 
in  such  manner  and  form  and  setting  forth  such  facts  as 
said  commission  shall  deem  necessary  to  enforce  the  provi- 
sions of  this  act.     Such  statement  shall  be  made  upon  the 
oath  or  affirmation  of  the  president,  vice-president  or  other 
principal  officer  and  the  treasurer  of  said  corporation,  joint 
stock  company  or  association. 

4.  Whenever  in  the  judgment  of  the  assessor  of  incomes 
any  person  in  his  district  other  than  a  corporation,  joint 
stock  company  or  association  shall  be  subject  to  an  income 
tax  under  the  provisions  of  this  act,  he  shall  require  such 
person  to  make  report  in  such  manner  and  form  as  the  tax 
commission  may  prescribe,  specifying  particularly   among 
other  items  the  amount  of  income  received  from  services, 
unsecured  notes,  mortgages,  bonds,  stocks,  real  estate  and 
other  such  information  as  the  commission  may  deem  neces- 
sary to  enforce  the  provisions  of  this  act. 

5.  Every  guardian,  trustee,  executor,  administrator,  agent 
or  receiver,  and  every  other  person  or  corporation  acting 
in  a  fiduciary  capacity,  shall  make  and  render  to  the  asses- 
sor of  incomes  of  the  district  in  which  such  representative 
resides,  a  verified  list  or  return  as  aforesaid  of  the  amount 
of  income  of  any  such  person,  ward,  or  beneficiary.     The 
return  so  made  shall  be  signed  by  the  person  rendering  it, 
and  by  the  president  or  secretary  thereof,  if  a  corporation. 

6.  For  each  question  unanswered,  the  assessor  or  deputy 

(355) 


INCOME    TAXATION  (Appdx. 

assessor,  failing  to  present  satisfactory  cause  for  such  omis- 
sion to  the  state  tax  commission,  shall  be  subject  to  a  pen- 
alty of  five  dollars,  and  said  penalty  shall  be  deducted  from 
the  compensation  of  said  assessor  or  deputy  assessor  at  the 
time  such  compensation  is  paid. 

Section  1087m — 11.  1.  Whenever  evidence  shall  be  pro- 
duced before  the  state  tax  commission,  which  in  the  opinion 
of  the  commission,  justifies  the  belief  that  in  any  one  or 
more  of  the  three  next  previous  years  the  returns  made  by 
any  corporation,  joint  stock  company  or  association  are  in- 
correct, or  are  made  with  false  or  fraudulent  intent,  or 
when  any  corporation,  joint  stock  company  or  association 
has  failed  or  refused  to  make  a  return  as  required  by  law 
the  state  tax  commission  may  require  from  every  such  cor- 
poration, joint  stock  company  or  association  such  further 
information  with  reference  to  its  capital,  income,  losses,  ex- 
penditures and  business  transactions  as  is  deemed  expedi- 
ent. Upon  the  information  so  required  the  state  tax  com- 
mission may  make  such  additions  or  corrections  to  the  as- 
sessment as  is  deemed  true  and  just,  such  corrections  to  be 
made  in  the  next  tax  levy.  Whenever  the  state  tax  com- 
mission shall  so  increase  or  make  subject  to  tax  any  in- 
come, it  shall  give  notice  in  writing  to  the  person  liable  for 
the  payment  of  the  tax  on  said  income  of  the  amount  of  the 
assessment.  Such  notice  may  be  served  by  registered  mail. 

2.  In  case  any  return  made  by  any  corporation,  joint 
stock  company  or  association  is  made  with  false  or  fraudu- 
lent intent  or  in  case  of  a  refusal  or  neglect  to  make  a  re- 
turn as  required  by  law,  and  an  additional  amount  is  dis- 
covered, the  amount  so  discovered  shall  be  subject  to  twice 
the  original  rate.    The  amount  so  added  to  the  tax  shall  be 
collected  at  such  time  and  in  such  manner  as  may  be  desig- 
nated by  the  state  tax  commission. 

3.  In  case  of  neglect  occasioned  by  the  sickness  or  ab- 
sence of  an  officer  of  any  corporation,  joint  stock  company 

(356) 


Appdx.)  WISCONSIN   INCOME-TAX   LAW   OF    1911 

or  association  required  to  make  said  return,  or  for  other 
sufficient  reason,  the  state  tax  commission  may  allow  such 
further  time  for  making  and  delivering  such  return  as  it 
may  deem  necessary,  not  to  exceed  thirty  days. 

4.  If  any  of  the  corporations,  joint  stock  companies  or 
associations  aforesaid  shall  fail  or  refuse  to  make  a  return 
at  the  time  or  times  hereinbefore  specified  in  each  year,  or 
shall  render  a  false  or  fraudulent  return,  such  corporation, 
joint  stock  company  or  association  shall  be  liable  to  a  pen- 
alty of  not  less  than  one  hundred  dollars  and  not  to  exceed 
five  thousand  dollars  at  the  discretion  of  the  court. 

5.  Any  officer  of  a  corporation,  joint  stock  company  or 
association  required  by  law  to  make,  render,  sign  or  verify 
any  return  who  makes  any  false  or  fraudulent  return  or 
statement,  with  intent  to  defeat  or  evade  the  assessment 
required  by  this  act  to  be  made,  shall  upon  conviction  be 
fined  not  to  exceed  five  hundred  dollars  or  be  imprisoned 
not  to  exceed  one  year,  or  both,  at  the  discretion  of  the 
court,  with  the  cost  of  prosecution. 

Section  1087m — 12.  1.  Whenever  the  assessor  of  in- 
comes or  the  county  board  of  review  herein  provided  for 
shall  have  reason  to  believe  that  in  any  one  or  more  of  the 
three  next  previous  years  the  returns  made  by  any  person 
other  than  a  corporation,  joint  stock  company  or  association 
are  incorrect  or  are  made  with  false  or  fraudulent  intent, 
or  when  any  such  person  has  failed  or  refused  to  make  a  re- 
turn as  required  by  law,  the  assessor  or  county  board  of 
review  shall  make  such  additions  or  corrections  to  the  next 
assessment  as  he  or  they  shall  deem  true  and  just.  When- 
ever the  assessor  or  the  county  board  of  review  shall  so  in- 
crease or  make  subject  to  tax  any  income  he  or  they  shall 
give  notice  in  writing  to  the  person  liable  for  the  payment 
of  the  tax  on  said  income  of  the  amount  of  the  assessment. 
Such  notice  may  be  served  by  registered  mail. 

2.  In  case  any  return  made  by  any  person  other  than  a 

(357) 


INCOME    TAXATION7  (Appdx. 

corporation,  joint  stock  company  or  association  is  made 
with  false  or  fraudulent  intent,  or  in  case  of  a  refusal  or 
neglect  to  make  a  return  as  required  by  law,  and  an  addi- 
tional amount  is  discovered,  the  amount  so  discovered  shall 
be  subject  to  twice  the  original  rate. 

3.  Any  person  other  than  a  corporation,  joint  stock  com- 
pany or  association  who  fails  or  refuses  to  make  a  return 
at  the  time  hereinbefore  specified  in  each  year  or  shall  ren- 
der a  false  or  fraudulent  return  shall  upon  conviction  be 
fined  not  to  exceed  five  hundred  dollars,  or  be  imprisoned 
not  to  exceed  one  year,  or  both,  at  the  discretion  of  the 
court,  together  with  the  cost  of  prosecution. 

Section  1087m — 13.  Any  corporation,  joint  stock  com- 
pany or  association  subject  to  assessment  by  the  state  tax 
commission,  feeling  aggrieved  by  the  decision  of  said  com- 
mission regarding  the  assessment  of  its  income,  shall  be 
granted  the  same  rights  of  hearing  and  appeal  as  are  now 
granted  corporations  assessed  by  said  commission. 

Section  1087m — 14.  The  state  tax  commission  shall  ap- 
point three  resident  tax  payers  of  each  county  to  serve  as 
a  county  board  of  review,  and  shall  fix  their  compensation, 
which  shall  not  be  more  than  ten  dollars  per  day,  and  shall 
be  audited  and  paid  in  the  same  manner  as  the  salary  of 
assessors  under  this  act  is  paid. 

Section  1087m — 15.  The  county  clerk  shall  be  clerk  of 
such  board,  and  shall  keep  an  accurate  record  of  all  pro- 
ceedings thereof,  including  a  correct  record  of  all  changes 
in  the  assessment  rolls  made  by  the  board.  The  county 
clerk  shall  take  full  minutes  of  all  evidence  given  before  the 
board ;  provided,  however,  that  the  board,  with  the  approv- 
al of  the  assessor  of  incomes,  may  in  cases  where  they 
deem  it  advisable,  employ  a  stenographic  reporter  to  take 
such  evidence  in  shorthand,  and  extend  the  same  in  type- 
written form.  The  county  clerk  shall  preserve  in  his  office 
a  record  of  all  such  proceedings,  minutes  and  evidence  tak- 

(358) 


Appdx.)  WISCONSIN  INCOME-TAX  LAW   OF    1911 

en,  and  all  documentary  evidence  offered.  The  stenograph- 
er shall  be  paid  by  the  state,  but  the  board  may,  in  its  dis- 
cretion, charge  the  expenses  to  the  complaining  party  or 
parties  appearing  before  the  board. 

Section  1087m — 16.  1.  The  county  board  of  review  of 
each  county,  constituting  an  assessment  district,  shall  meet 
annually  on  the  last  Monday  of  July  at  ten  o'clock  a.  m.  at 
the  court  house  in  said  county  to  hear  complaints  and  to 
review  the  assessments  of  income  made  by  the  assessor.  A 
majority  shall  constitute  a  quorum. 

2.  In  assessment  districts  composed  of  more  than  one 
county  the  board  of  review  of  the  county  designated  by  the 
assessor  of  incomes  shall  meet  as  provided  above  and  the 
board  of  review  of  each  remaining  county  of  the  district 
shall  meet  as  soon  thereafter  as  is  possible  for  the  assessor 
of  incomes  to  be  present.     The  date  of  such  meeting  shall 
be  fixed  by  the  assessor  of  incomes. 

3.  Notice  of  the  annual  meeting  of  each  county  board  of 
review  shall  be  published  in  a  newspaper  of  the  county  at 
least  one  week  previous  to  such  meeting. 

4.  The  board  may  adjourn  from  day  to  day,  and  from 
time  to  time,  until  its  business  is  completed,  but  no  ad- 
journment other  than  from  day  to  day  shall  be  had  except 
upon  written  request  and  for  satisfactory  cause  shown. 

5.  Attendance  of  witnesses  and  the  production  of  books 
and  papers  before  said  board  may  be  compelled  by  sub- 
poena, issued  by  the  clerk  thereof,  a  justice  of  the  peace  or 
a  court  commissioner. 

Section  1087m — 17.  1.  The  board  shall  hear  and  exam- 
ine, and  permit  the  assessor  to  examine,  any  aggrieved  or 
other  person  upon  oath  who  shall  appear  before  it  in  rela- 
tion to  any  assessment  or  commission  [sic]  of  income,  and 
may  increase  or  lessen  the  amount  of  any  income  assessed, 
if  satisfied  from  the  evidence  submitted  and  the  statements 
of  the  assessor,  that  such  change  should  be  made. 

(359) 


INCOME    TAXATION  (Appdx. 

2.  The  board  shall  not  increase  any  assessments,  nor  as- 
sess any  income  not  on  the  roll  without  notice  in  writing  to 
the  person  liable  for  payment  of  the  tax  thereon,  or  his 
agent,  if  either  be  resident  of  the  county,  of  such  intention 
in  time  to  appear  and  be  heard  before  the  board  in  relation 
thereof. 

Section  1087m — 18.  No  person  subject  to  assessment  by 
the  county  assessor  shall  be  allowed  in  any  action  or  pro- 
ceeding to  question  any  assessment  of  income,  unless  ob- 
jections thereto  shall  first  have  been  presented  to  the  coun- 
ty board  of  review  in  good  faith  and  full  disclosure  made 
under  oath  of  any  and  all  income  of  such  party  liable  to  as- 
sessment. 

Section  1087m — 19.  1.  Any  person  dissatisfied  with  any 
determination  of  the  county  board  of  review  may  appeal 
within  twenty  days  to  the  state  tax  commission,  to  whom 
a  copy  of  the  record  of  the  board  shall  be  certified,  together 
with  all  evidence  or  a  copy  thereof,  relating  to  such  assess- 
ment. 

2.  The  tax  commission  shall  review  such  assessments 
from  the  record  thus  submitted  and  shall  make  necessary 
corrections  and  certify  its  conclusion  to  the  county  clerk, 
who  shall  duly  notify  the  person  liable  for  the  tax  and  en- 
ter upon  the  assessment  roll  any  change  made  by  the  com- 
mission. 

Section  1087m — 20.  1.  The  state  tax  commission  shall 
complete  the  assessment  of  income  for  each  corporation, 
joint  stock  company,  and  association  on  or  before  the  fif- 
teenth day  of  October  in  each  year  and  compute  the  tax 
thereon,  and  shall  thereupon  forthwith  certify  to  each  coun- 
ty clerk  a  statement  of  the  assessment  of  each  corporation, 
joint  stock  company  and  association  in  his  county  and  the 
amount  of  tax  levied  against  each. 

2.  The  state  tax  commission  shall  submit  in  their  bien- 
nial report  the  amount  of  income  tax  collected  for  each  county 

(360) 


Appdx.)  WISCONSIN   INCOME-TAX   LAW   OF    1911 

in  the  state,  and  shall  designate  the  several  general  classes  of 
property  from  which  the  incomes  were  received,  the  cost 
to  the  state  and  each  county  for  the  administration  of  the 
law,  and  all  such  facts  as  shall  be  required  to  give  a  definite 
understanding  of  the  financial  operations  of  the  law. 

Section  1087m — 21.  The  tax  upon  the  income  of  persons 
other  than  corporations,  joint  stock  companies  and  associa- 
tions shall  be  computed  by  the  county  clerk,  assisted  by  the 
assessor  of  incomes,  and  said  clerk  shall  on  or  before  No- 
vember first,  certify  to  each  town,  city  and  village  clerk  the 
names  of  all  persons  whose  incomes  are  assessed  in  his  own 
town,  city  or  village,  and  the  amount  of  tax  levied  against 
each  such  person,  and  such  amount  shall  be  entered  by  the 
town,  city  and  village  clerks  in  a  separate  column  designat- 
ed "income  tax"  upon  the  tax  roll  of  the  year,  and  shall  be 
collected  and  paid  as  personal  property  taxes  are  now  col- 
lected and  paid. 

Section  1087m — 22.  The  place  at  which  the  income  tax 
herein  provided  for  shall  be  assessed,  levied  and  collected 
shall  be  determined  as  follows : 

1.  In  their  return  for  purposes  of  assessment  persons  de- 
riving incomes  from  within  and  without  the  state,  or  from 
more  than  one  political  subdivision  of  the  state,  shall  make 
a  separate  accounting  of  the  income  derived  from  without 
the  state  and  from  each  political  subdivision  of  the  state  in 
such  form  and  manner  as   the  tax  commission  may  pre- 
scribe. 

2.  The  entire  taxable  income  of  every  person  deriving  in- 
come from  within  and  without  the  state  or  from  within  dif- 
ferent political  subdivisions  of  the  state,  when  such  person 
resides  within  the  state,  shall  be  combined  and  aggregated 
for  the  purpose  of  determining  the  proper  exemptions  and 
proper  rate  of  taxation.    The  taxable  income  so  computed 
shall  be  assessed,  and  taxes  at  such  rate  shall  be  paid,  in 
the  several  towns,  cities  and  villages  in  proportion  to  the 

(361) 


INCOME    TAXATION  (Appdx. 

respective  amounts  of  income  derived  from  each,  counting 
that  part  of  income  derived  from  without  the  state  when 
taxable  as  having  been  derived  from  the  town,  city  or  vil- 
lage in  which  said  person  resides. 

3.  Income   derived   by   non-residents  of  the   state  from 
sources  within  the  state  or  within  its  jurisdiction,  shall  be 
separately  assessed  and  taxed  in  the  town,  city  or  village 
from  which  such  income  is  derived,  at  a  rate  determined  by 
the  total  income  derived  from  within  any  single  town,  city 
or  village. 

4.  All   laws   not    in    conflict   with   the   provisions    of    this 
act  regulating  the  time,  place  and  manner  of  payment  of 
taxes  on  personal  property,  the  collection  thereof  by  action, 
distress  or  otherwise  and  the  return  of  personal  property 
taxes  unpaid,  shall  apply  to  the  income  tax  herein  provided 
for. 

Section  1087m — 23.  The  revenue  derived  from  such  in- 
come tax  shall  be  divided  as  follows,  to-wit :  Ten  per  cent 
to  the  state,  twenty  per  cent  to  the  county  and  seventy  per 
cent  to  the  town,  city  or  village  in  which  the  tax  was  as- 
sessed, levied  and  collected,  which  shall  be  remitted  and 
accounted  for  in  the  same  manner  as  the  state  and  county 
taxes  collected  from  property  are  remitted  and  paid. 

Section  1087m — 24.  1.  No  commissioner,  assessor  of  in- 
comes, deputy,  member  of  a  county  board  of  review,  or 
any  other  officer,  agent,  clerk  or  employe  shall  divulge  or 
make  known  to  any  person  in  any  manner  except  as  provid- 
ed by  law  any  information  whatsoever  obtained  directly  or 
indirectly  by  him  in  the  discharge  of  his  duties  or  permit 
any  income  return  or  copy  thereof  or  any  paper  or  book  so 
obtained  to  be  seen  or  examined  by  any  person  except  as 
provided  by  law. 

2.  Any  officer,  clerk,  agent  or  employe  violating  any  of 
the  provisions  of  this  section  shall  upon  conviction  thereof 
be  punished  by  fine  of  not  less  than  one  hundred  dollars  nor 
(362) 


Appdx.)  WISCONSIN  INCOME-TAX  LAW   OF    1911 

more  than  five  hundred  dollars,  or  by  imprisonment  in  the 
county  jail  for  not  less  than  one  month  nor  more  than  six 
months,  or  by  imprisonment  in  the  state  prison  for  not 
more  than  two  years,  at  the  discretion  of  the  court. 

3.  Such  officer,  agent,  clerk  or  employe  upon  such  con- 
viction shall  also  forfeit  his  office  or  employment  and  shall 
be  incapable  of  holding  any  public  office  in  this  state  for  a 
period  of  three  years  thereafter. 

4.  Nothing  herein  shall  be  construed  as  preventing  the 
assessment  roll,  the  tax  roll  and  all  proceedings  had  before 
the  county  board  of  review  and  all  evidence  taken  at  such 
hearing  from  being  open  to  public  inspection  at  such  times 
and  under  such  conditions  as  the  state  tax  commission  may 
direct. 

Section  1087m — 25.  1.  On  and  after  the  first  Monday  in 
January,  1912,  the  office  of  county  supervisor  of  assessment 
is  hereby  abolished. 

2.  The  assessor  of  incomes  shall  on  and  after  the  first 
Monday  of  January,  1912,  in  addition  to  the  duties  and 
powers  herein  imposed  and  conferred  upon  him,  perform 
all  the  duties  and  possess  all  the  powers  heretofore  imposed 
and  conferred  by  law  upon  the  said  county  supervisor  of 
assessment.  The  assessor  of  incomes  shall  be  under  the 
direction  and  control  of  the  state  tax  commission,  and  shall 
make  such  reports  to  the  commission,  to  the  county  board 
of  review  and  the  county  board  of  supervisors,  and  perform 
such  other  duties  as  the  commission  shall  direct. 

Section  1087m — 26.  Any  person  who  shall  have  paid  a 
tax  upon  his  personal  property  during  any  year  shall  be 
permitted  to  present  the  receipt  therefor  to,  and  have  the 
same  accepted  by,  the  tax  collector  to  its  full  amount  in  the 
payment  of  taxes  due  upon  the  income  of  such  person  dur- 
ing said  year.  Any  bank  which  has  paid  taxes  during  any 
year  upon  its  shares  assessed  to  the  individual  stockholders 
thereof  shall  be  entitled,  under  the  provisions  of  this  sec- 

(363) 


INCOME   TAXATION  (Appdx. 

tion,  to  present  the  receipt  therefor,  and  have  the  same  ac- 
cepted by  the  tax  collector  to  its  full  amount  in  the  pay- 
ment of  taxes  upon  the  income  of  such  bank  during  said 
year. 

Section  1087m — 27.  Nothing  contained  in  this  act  shall 
be  construed  to  affect  the  assessment  or  collection  of  taxes 
assessed  in  the  year  1911  or  prior  thereto,  under  present 
laws,  nor  to  limit  the  power  of  assessors  and  boards  of  re- 
view relative  to  correcting  assessment  rolls,  placing  omit- 
ted property  thereon,  and  reassessing  property  whenever 
such  correction,  insertion  of  omitted  property,  or  reassess- 
ment might  be  made  under  the  laws  as  they  now  exist. 

Section  1087m — 28.  The  state  tax  commission  is  hereby 
empowered  to  make  such  rules  and  regulations  as  it  shall 
deem  necessary  in  order  to  carry  out  the  foregoing  provi- 
sions. 

.  Section  1087m — 29.  The  state  tax  commission  is  hereby 
authorized  to  employ  such  clerks  and  specialists  as  are  nec- 
essary to  carry  into  effective  operation  this  act. 

Section  1087m — 30.  There  is  hereby  appropriated  from 
the  general  fund  of  the  state,  out  of  any  money  in  the  state 
treasury  not  otherwise  appropriated,  a  sum  sufficient  to 
carry  out  the  provisions  of  this  act. 

(364) 


App'dx.)  SOUTH   CAEOLINA   INCOME   TAX   LAW 


SOUTH   CAROLINA  INCOME  TAX  LAW 

Civil  Code  South  Carolina,  1902,  Sections  325-331 

Section  325.  There  shall  be  annually  assessed,  levied  and 
collected  upon  the  gains,  gross  profits  and  income  received 
during  the  preceding  calendar  year  by  every  citizen  of 
this  state,  whether  such  gains,  profits  or  income  be  derived 
from  any  kind  of  property,  rents,  interests,  dividends,  or 
salaries,  or  from  any  profession,  trade,  employment,  or  vo- 
cation carried  on  in  this  state,  or  from  any  other  source 
whatever,  a  tax  of  one  per  centum  on  the  amount  so  derived 
over  and  above  $2,500  and  up  to  $5,000;  one  and  one-half 
per  centum  on  $5,000  and  over,  up  to  $7,500;  two  per  cent- 
um on  $7,500  and  over,  up  to  $10,000;  two  and  one-half  per 
centum  on  $10,000  and  over,  up  to  $15,000;  three  per  centum 
on  $15,000  and  over;  and  a  like  tax  shall  be  assessed,  levied 
and  collected  annually  upon  the  gains,  profits  and  income 
from  all  property  owned,  and  every  business,  trade  or  pro- 
fession carried  on  in  this  state  by  persons  residing  without 
this  state,  excepting  such  corporations  as  are  hereinafter 
excepted :  Provided  that,  in  estimating  the  gains,  profits 
and  income  there  shall  not  be  included  interest  upon  such 
bonds  or  securities  of  this  state,  or  of  the  United  States,  the 
principal  and  interest  of  which  are,  by  the  law  of  their  is- 
sue, exempt  from  taxation. 

Section  326.  In  computing  incomes,  the  necessary  ex- 
penses actually  incurred  in  carrying  on  any  business,  occu- 
pation or  profession,  not  including  remuneration  to  the  tax- 
payer for  personal  supervision  or  the  support  and  mainte- 
nance of  his  or  her  family,  shall  be  deducted  from  the  gross 
income  or  revenue ;  and  the  word  "income,"  as  used  in  this 
article,  shall  be  deemed  and  taken  to  mean  "gross  profits :" 
Provided,  that  no  deduction  shall  be  made  or  allowed  for 

(365) 


INCOME   TAXATION  (Appdx. 

any  amount  paid  or  contracted  for  permanent  improve- 
ments or  betterments  made  to  increase  the  value  of  any 
property  or  estate,  or  for  the  increase  of  capital,  capital 
stock  or  assets. 

Section  327.  The  words  "citizen"  and  "person,"  as  used 
in  this  article,  shall  be  deemed  to  include  all  natural  persons, 
all  copartnerships,  and  all  members  of  any  incorporated  as- 
sociation, and  to  exclude,  except  as  hereinafter  included,  all 
corporations  duly  chartered  by  the  laws  of  the  United  States 
or  of  this  or  any  other  state. 

Section  328.  The  tax  herein  provided  for  shall  be  assess- 
ed, levied,  and  collected  in  the  same  manner,  at  the  same 
time,  as  other  taxes,  and  by  the  same  county  officials  as  are 
now  charged  with  the  assessment,  levy,  and  collection  of 
state  and  county  taxes,  and  shall  be  paid  into  the  state  treas- 
ury as  other  general  state  taxes. 

Section  329.  All  persons  liable  for  the  payment  of  any 
of  the  tax  herein  provided  for  shall,  at  the  time  now  or  here- 
after provided  for  the  making  of  returns  of  personal  prop- 
erty make,  under  oath,  a  full  and  complete  list  or  return,  in 
such  form  and  manner  as  may  be  directed  by  the  Comptrol- 
ler General,  to  the  auditor  of  the  county  in  which  they  re- 
side ;  or,  in  case  of  nonresidents,  of  the  county  or  counties 
where  said  gains,  profits,  or  income  arise,  of  the  amount  of 
their  income,  gains,  and  profits  as  aforesaid,  and  the  prop- 
erty or  investment,  if  any,  upon  which  the  same  are  com- 
puted, and  such  other  particulars  as  may  be  required  by 
the  Comptroller  General.  All  persons,  whether  natural  or 
corporations  created  by  charter,  acting  as  guardians,  trus- 
tees, executors,  administrators,  agents,  receivers,  or  in  any 
other  fiduciary  capacity,  shall  make  and  render  a  list  or  re- 
turn as  aforesaid  to  the  auditor  of  the  county  in  which  such 
persons  or  corporations  acting  in  a  fiduciary  capacity  reside 
or  do  business,  of  the  income,  gains  and  profits  of  any  minor 
or  person  for  whom  they  act. 

(366) 


Appdx.)  VIRGINIA   INCOME   TAX   LAW 

Section  330.  Any  person  or  corporation  failing  or  refus- 
ing to  make  the  list  or  return  required  by  this  act,  or  ren- 
dering a  willfully  false  or  fraudulent  list  or  return,  shall  be 
assessed  by  the  auditor  on  account  of  said  income  tax,  in 
such  amount  as  appears  to  him  from  the  best  information 
obtainable  by  him  either  by  examination  of  the  defaulting 
taxpayer  or  any  other  evidence,  that  such  taxpayer  is  liable 
for;  and  in  case  of  failure  or  neglect  to  make  said  list  or 
return,  the  said  auditor  shall  add  fifty  per  centum  as  a  pen- 
alty to  the  amount  of  tax  due ;  and  in  case  of  a  willfully 
false  or  fraudulent  return  or  list  having  been  rendered,  the 
auditor  shall  add  one  hundred  per  centum  as  a  penalty  to 
said  tax ;  the  tax  and  the  additions  thereto  as  a  penalty  to 
be  assessed  and  collected  in  the  manner  provided  for  in  the 
case  of  failure  to  make  returns  or  lists  of  personal  property. 

Section  331.  In  every  respect  not  herein  specified,  the 
returns  for  and  the  levy  and  collection  of  the  tax  provided  in 
this  act  shall  be  subject  to  all  the  provisions  of  law  relative 
to  the  assessment  and  collection  of  taxes  on  personal  prop- 
erty. 

VIRGINIA  INCOME  TAX  LAW 

Acts  Virginia  1903,  c.  148,  p.  155,  as  amended  by  Acts  1908, 
c.  10,  p.  20 

Section  3.  The  taxable  subjects  shall  be  classified  by 
schedules,  as  follows : 

Section  10.  The  classification  under  schedule  D  shall  be 
as  follows,  to  wit :  The  aggregate  amount  of  income  in  ex- 
cess of  one  thousand  dollars,  whether  received  or  due  but 
not  received,  within  the  year  next  preceding  the  first  of 
February  in  each  year. 

Income  shall  include : 

First.  All  rents,  except  ground  rents  or  rents  charge, 
salaries,  interest  upon  notes,  bonds,  or  other  evidences  of 

(367) 


INCOME   TAXATION  (Appdx. 

debt,  of  whatever  description,  of  the  United  States,  or  any 
other  state  or  country,  or  any  corporation,  company,  part- 
nership, firm,  or  individual,  collected  or  received  during  the 
year,  less  the  interest  due  and  paid  during  the  year. 

Second.  The  amount  of  all  premiums  on  gold,  silver,  or 
coupons. 

Third.  The  amount  of  sales  of  live  stock  and  meat  of  all 
kinds,  less  the  value  assessed  thereon  the  previous  year  by 
the  commissioner  of  the  revenue. 

Fourth.  The  amount  of  sales  of  wood,  butter,  cheese, 
hay,  tobacco,  grain  and  other  vegetable  and  agricultural 
productions  during  the  preceding  year,  whether  the  same 
was  grown  during  the  preceding  year  or  not,  less  all  sums 
paid  for  taxes  and  for  labor,  fences,  fertilizers,  clover  or 
other  seed  purchased  and  used  upon  the  land  upon  which 
the  vegetable  and  agricultural  productions  were  grown  or 
produced,  and  the  rent  of  said  land  paid  by  said  person,  if 
he  be  not  the  owner  thereof. 

Fifth.  All  other  gains  and  profits  derived  from  any 
source  whatever. 

In  addition  to  the  sum  of  one  thousand  dollars  as  afore- 
said, there  shall  be  deducted  from  the  income  of  the  person 
assessed,  all  losses  sustained  during  the  year:  provided  fur- 
ther, that  only  one  deduction  of  one  thousand  dollars  shall 
be  made  from  the  aggregate  income  of  any  family,  except 
that  guardians  may  make  a  separate  deduction  of  one  thou- 
sand dollars,  in  favor  of  each  ward,  out  of  income  coming 
to  said  ward. 

Section  11.  On  income,  as  defined  in  this  schedule,  the 
tax  shall  be  one  per  centum. 

(368) 


Appdx.)  OKLAHOMA   INCOME   TAX   LAW 


OKLAHOMA  INCOME  TAX  LAW 

Laws  Oklahoma    1907,  p.  730 

Section  1.  At  the  time  of  making  the  assessment  of  real 
and  personal  property  for  taxation  in  this  state,  the  asses- 
sor shall  demand  of  each  person  a  list  of  his  income  for  the 
year  ending  June  thirtieth  last  preceding,  in  excess  of  three 
thousand  five  hundred  dollars.  The  blank  for  listing  taxes 
shall  contain  the  question :  "Was  your  gross  income  from 
salaries,  fees,  trade,  profession  and  property  upon  which  a 
gross  receipt  or  excise  tax  has  not  been  paid,  any  and  all 
of  them,  for  the  year  ending  June  thirtieth  last  preceding, 
in  excess  of  three  thousand  five  hundred  dollars?" 

Section  2.  If  the  person  answers  the  question  in  the  af- 
firmative, he  shall  be  furnished  by  the  assessor  with  a  blank 
in  the  following  form,  to-wit: 

"To  the  Auditor  of  the  State  of  Oklahoma:  I  hereby 
certify  that  my  income  from  salaries,  fees,  trade,  profession 
and  property  upon  which  a  gross  receipt  or  excise  tax  has 
not  been  paid,  any  and  all  of  them,  for  the  year  ending  June 
thirtieth,  in  excess  of  three  thousand  five  hundred  dollars 
was  $ " 

"I,  being  duly  sworn,  do  certify  that  the 

foregoing  certificate  is  true  to  the  best  of  my  knowledge 
and  belief. 


"Subscribed  and  sworn  to  before  me  this  day 

of   . 


"Assessor." 

Said  person  shall  fill  out,  sign,  and  swear  to  said  certificate 

before  the  assessor  or  other  officer  authorized  by  law  to 

administer  oaths,  and  such  assessor  shall  forward  the  same 

BL.INC.TAX.— 24  (3G9) 


INCOME    TAXATION  (Appdx. 

to  the  state  auditor  not  later  than  July  first  of  that  year, 
and  said  state  auditor  shall  certify  the  amount  of  the  tax 
due  upon  the  income  so  reported  to  the  county  clerk  of  the 
county  in  which  said  person  resides,  who  shall  extend  the 
same  on  the  tax  rolls  and  shall  at  the  same  time  and  in  the 
same  manner  as  is  now,  or  may  hereafter  be,  provided  by 
law  relative  to  the  tax  lists  of  the  real  and  personal  proper- 
ty, deliver  the  same  to  the  county  treasurer. 

Section  3.  It  shall  be  the  duty  of  the  assessor  of  each 
township  to  furnish  the  state  auditor  a  list  of  all  persons 
whom  he  may  find  who  are  subject  to  the  above  tax  and 
who  have  filled  out  the  list  above  required,  together  with 
the  names  of  other  persons  in  his  township  not  appearing 
thereon,  who,  in  his  opinion,  may  be  liable  for  an  income 
tax  hereunder,  and  said  state  auditor  may  take  such  steps 
as  he  may  deem  necessary  to  require  any  such  person 
whose  name  is  added  to  make  proper  return  of  his  said  in- 
come, and  to  enable  him  to  obtain  such  information  he  or 
anyone  designated  by  him  to  obtain  such  information  shall 
have  the  power  to  summon  witnesses  within  the  county  in 
which  such  persons  live.  Provided,  however,  if  any  wit- 
ness so  subpoenaed  fails  and  refuses  to  appear  and  give  in- 
formation as  provided  by  this  section,  the  state  auditor 
shall  certify  such  fact  to  any  court  and  said  court  shall 
thereupon  issue  a  subpoena  requiring  the  person  subpoenaed 
to  appear  and  give  testimony  as  required  by  this  section, 
and  if  any  such  person  subpoenaed  shall  fail  or  refuse  to 
obey  said  subpoena,  such  person  shall  be  punished  as  pro- 
vided by  law  in  cases  of  contempt. 

Section  4.  There  is  hereby  levied,  for  the  benefit  of  the 
available  common  school  fund  of  the  state,  a  tax  of  five 
mills  on  the  dollar  on  the  excess  over  the  amount  of  three 
thousand  five  hundred  dollars  and  less  than  five  thousand, 
and  seven  and  one-half  mills  on  the  dollar  on  the  excess  of 
five  thousand  dollars  and  less  than  ten  thousand  dollars, 

(370) 


Appdx.)  OKLAHOMA   INCOME   TAX   LAW 

and  twelve  mills  on  the  dollar  on  the  excess  over  the 
amount  of  ten  thousand  dollars  and  less  than  twenty  thou- 
sand dollars,  and  fifteen  mills  on  the  dollar  on  the  excess 
over  the  amount  of  twenty  thousand  dollars  and  less  than 
fifty  thousand  dollars,  and  twenty  mills  on  the  dollar  on 
the  excess  over  the  amount  of  fifty  thousand  dollars  and 
less  than  one  hundred  thousand  dollars,  and  thirty-three 
and  one-third  mills  on  the  dollar  upon  all  amounts  over  one 
hundred  thousand  dollars  of  all  gross  incomes. 

Section  5.  The  above  tax  shall  not  be  levied  upon  the 
income  derived  from  property  upon  which  a  gross  receipt 
or  excise  tax  has  been  paid. 

Section  6.  It  shall  be  unlawful  for  any  person  to  print 
or  publish  in  any  manner  whatever  any  income  tax  return 
or  any  part  thereof,  or  the  taxes  due  thereon  unless  the  tax 
herein  becomes  delinquent,  and  any  person  violating  the 
provisions  of  this  section  shall  be  deemed  guilty  of  a  mis- 
demeanor and  shall  be  fined  not  to  exceed  fifty  dollars  and 
imprisoned  in  the  county  jail  not  more  than  thirty  days  for 
each  offense. 

Section  7.  If  any  of  the  taxes  herein  levied  become  de- 
linquent they  shall  become  a  lien  on  all  the  property,  per- 
sonal and  real,  of  such  delinquent  person  and  shall  be  sub- 
ject to  the  same  penalties  and  provisions  as  are  all  ad  va- 
lorem taxes. 

Section  8.  Any  person  making  the  affidavits  required 
herein,  who  shall  knowingly  swear  falsely  shall  be  guilty 
of  perjury. 

Section  9.  Any  assessor  who  shall  fail  or  refuse  to  per- 
form the  duties  herein  imposed  shall  be  guilty  of  malfeas- 
ance in  office  and  shall  forfeit  the  amount  of  taxes  lost  by 
the  state  by  such  failure  or  refusal,  to  be  collected  in  a  civil 
action  in  the  name  of  the  state  against  the  assessor. 

Section  10.  All  acts  and  parts  of  acts  in  conflict  here- 
with are  hereby  repealed. 

(371) 


INCOME   TAXATION  (Appdx. 

Section  11.  An  emergency  is  hereby  declared  to  exist 
by  reason  whereof  this  act  shall  take  effect  and  be  in  force 
from  and  after  its  passage  and  approval. 

Approved  May  26,  1908. 


NORTH  CAROLINA  INCOME  TAX  LAW 

Acts  North  Carolina,  1907,  c.  256,  §§  22-25,  p.  298 

Section  22.  The  tax  payer  shall  list  his  income  for  the 
year  ending  June  first  from  any  and  all  sources  in  excess  of 
one  thousand  dollars. 

Section  23.  The  blank  for  listing  taxes  shall  contain  the 
following  question :  "Was  your  gross  income  from  salaries, 
fees,  trade,  profession  and  property  not  taxed,  any  or  all  of 
them,  for  the  year  ending  June  first,  in  excess  of  one  thou- 
sand dollars?"  If  the  tax  payer  answers  this  question  in  the 
affirmative,  he  shall  be  furnished  by  the  list-taker  with  a 
blank  in  the  following  form,  to  wit : 

"To  the  Corporation  Commission  of  the  State  of  North 
Carolina:  I  hereby  certify  that  my  income  from  salaries, 
fees,  trade,  profession  and  property  not  taxed,  any  or  all  of 
them,  for  the  year  ending  June  first,  in  excess  of  one  thou- 
sand dollars  was  $ 


" being  duly  sworn,  says  that  the  foregoing 

certificate  is  true  to  the  best  of  his  knowledge  and  belief. 
"Subscribed  and   sworn  to  before  me  this    ....    day  of 


Said  tax  payer  shall  fill  out,  sign,  and  swear  to  said  cer- 
tificate before  the  list-taker  or  other  officer  authorized  by 
law  to  administer  oaths,  and  the  list-taker  shall  forward  the 
same  to  the  Corporation  Commission  of  the  State  not  later 

(372) 


Appdx.)  NORTH    CAROLINA   INCOME   TAX   LAW 

than  July  first  of  that  year ;  and  said  Corporation  Commis- 
sion shall  certify  the  amount  of  the  tax  due  upon  the  in- 
come so  reported  to  the  chairman  of  the  Board  of  County 
Commissioners  of  the  county  in  which  said  tax  payer  re- 
sides, and  the  same  shall  be  paid  to  the  sheriff  of  said  coun- 
ty, together  with  other  taxes  for  that  year;  and  it  shall  be 
unlawful  for  any  person  to  print  or  publish  in  any  manner 
\vhatever  any  income,  tax  return  or  any  part  thereof,  or 
the  amount  or  source  of  income  appearing  in  any  such  re- 
turn, or  the  taxes  due  thereunder,  and  any  person  offending 
against  the  provisions  of  this  section  shall  be  guilty  of  a 
misdemeanor  and  be  punished  by  a  fine  not  exceeding  fifty 
dollars,  or  be  imprisoned  not  more  than  thirty  days  for  each 
offense. 

At  the  time  said  tax  payer  states  to  the  list-taker  that  he 
is  liable  for  a  tax  upon  his  income,  as  herein  provided,  said 
list-taker  shall  note  the  same  on  a  list  to  be  kept  by  him  for 
that  purpose,  and  on  or  before  July  fifth  next  he  shall  re- 
turn such  list  to  the  chairman  of  the  Board  of  Commission- 
ers of  that  county,  and  said  chairman  shall  within  five  days 
thereafter  furnish  to  said  Corporation  Commission  a  copy 
of  such  list,  and  the  names  of  any  other  persons  in  his  coun- 
ty not  appearing  thereon,  who  in  his  opinion  may  be  liable 
for  an  income  tax  hereunder,  and  said  Corporation  Commis- 
sion may  take  such  steps  as  he  may  deem  necessary  to  re- 
quire any  such  person  whose  name  is  so  added  to  make 
proper  return  of  his  said  income. 

Section  24.  On  all  gross  incomes  as  provided  in  the  pre- 
ceding section  hereof,  a  tax  shall  be  levied  as  follows :  On 
the  excess  over  the  amount  legally  exempted,  one  per  cent. 
The  above  tax  shall  not  be  levied  upon  the  income  derived 
from  property  already  taxed,  nor  upon  income  less  than  one 
thousand  dollars.  The  incomes  subject  to  the  above  tax 
are  those  derived  from  property  not  taxed;  from  salaries, 

(373) 


INCOME    TAXATION  (Appdx. 

fees  and  commissions,  public  or  private;  from  annuities, 
from  trades  or  professions,  and  from  any  other  sources  the 
incomes  from  which  are  not  specifically  exempted  from  tax- 
ation by  law. 

Section  25.     No  city,   town,  township,  or  county  shall 
levy  any  inheritance  or  income  tax. 


HAWAIIAN  INCOME  TAX  LAW 

Session  Laws  Hawaii,   1901,  Act  No.  20,  pp.  31-35 

Section  1.  From  and  after  the  first  day  of  July,  A.  D. 
1901,  there  shall  be  levied,  assessed,  collected  and  paid  an- 
nually upon  the  gains,  profits,  and  income  over  and  above 
one  thousand  dollars,  derived  by  every  person  residing  in 
the  territory  of  Hawaii  from  all  property  owned,  and  all 
business,  trade,  profession,  employment  or  vocation  carried 
on  in  the  territory,  and  by  every  person  residing  without 
the  territory  from  all  property  owned,  and  every  business, 
trade,  profession,  employment  or  vocation  carried  on  in  the 
territory,  and  by  every  servant  or  officer  of  the  territory, 
wherever  residing,  a  tax  of  two  per  cent,  on  the  amount  so 
derived  during  the  year  preceding. 

Section  2.  There  shall  be  levied,  assessed,  collected  and 
paid  annually,  except  as  hereinafter  provided,  a  tax  of  two 
per  cent,  on  the  net  profit  or  income  above  actual  operating 
and  business  expenses,  from  all  property  owned,  and  every 
business,  trade,  employment  or  vocation  carried  on  in  the 
territory  of  Hawaii,  of  all  corporations  doing  business  for 
profit  in  the  territory,  no  matter  where  created  and  organ- 
ized: Provided,  however,  that  nothing  therein  [herein] 
contained  shall  apply  to  corporations,  companies  or  asso- 
ciations conducted  solely  for  charitable,  religious,  educa- 
tional or  scientific  purposes,  including  fraternal  beneficiary 

(374) 


Appdx.)  HAWAIIAN   INCOME   TAX   LAW 

societies,  nor  to  insurance  companies  taxed  on  a  percentage 
of  the  premium  under  the  authority  of  another  act. 

Section  3.  In  estimating  the  gains,  profits,  and  income 
of  any  person  or  corporation,  there  shall  be  included  all  in- 
come derived  from  interest  upon  notes,  bonds  and  other  se- 
curities, except  such  bonds  of  the  territory  of  Hawaii,  or  of 
municipalities  hereafter  created  by  the  territory,  the  princi- 
pal and  interest  of  which  are  by  the  law  of  their  issuance 
exempt  from  all  taxation;  profits  realized  within  the  year 
from  sales  of  real  estate,  including  leaseholds  purchased 
within  two  years,  dividends  upon  the  stock  of  any  corpora- 
tion; the  amount  of  all  premium  on  bonds,  notes  or  cou- 
pons ;  the  amount  of  sales  of  all  movable  property,  less  the 
amount  expended  on  the  purchase  or  production  of  the 
same,  and  in  the  case  of  a  person  not  including  any  part 
thereof  consumed  directly  by  him  or  his  family ;  money  and 
the  value  of  all  personal  property  acquired  by  gift  or  inher- 
itance, and  all  other  gains,  profits  and  income  derived  from 
any  source  whatsoever. 

Section  4.  The  net  profits  or  income  of  all  corporations 
shall  include  the  amounts  paid  or  payable  to,  or  distributed 
or  distributable  among  shareholders  from  any  fund  or  ac- 
count, or  carried  to  the  account  of  any  fund  or  used  for  con- 
struction, enlargements  of  plant,  or  any  other  expenditure 
or  investment  paid  from  the  net  annual  profits  made  or  ac- 
quired by  said  corporation.  In  computing  incomes,  the  nec- 
essary expenses  actually  incurred  in  carrying  on  any  busi- 
ness, trade,  profession,  or  occupation,  or  in  managing  any 
property,  shall  be  deducted,  and  also  all  interest  paid  by 
such  person  or  corporation  on  existing  indebtedness.  And 
all  government  taxes  and  license  fees  paid  within  the  year 
shall  be  deducted  from  the  gains,  profits  or  income  of  the 
person  who,  or  the  corporation  which,  has  actually  paid  the 
same,  whether  such  person  or  corporation  be  owner,  tenant 
or  mortgagor;  also  all  losses  actually  sustained  during  the 

(375) 


INCOME   TAXATION  (Appdx. 

year  incurred  in  trade  or  arising  from  losses  by  fire  not  cov- 
ered by  insurance,  or  losses  otherwise  actually  incurred. 
Provided,  that  no  deduction  shall  be  made  for  any  amount 
paid  out  for  new  buildings,  permanent  improvements  or 
betterments  made  to  increase  the  value  of  any  property  or 
estate.  Provided,  further,  that  no  deduction  shall  be  made 
for  personal  or  family  expenses,  the  exemption  of  one  thou- 
sand dollars,  mentioned  in  section  1,  being  in  lieu  of  same. 
Provided,  further,  that  where  allowable  herein,  only  one 
deduction  of  one  thousand  dollars  shall  be  made  from  the 
aggregate  annual  income  of  all  the  members  of  one  family 
composed  of  one  or  both  parents  and  one  or  more  minor 
children,  or  husband  and  wife ;  that  guardians  shall  be  al- 
lowed to  make  a  deduction  in  favor  of  each  and  every  ward, 
except  where  two  or  more  wards  are  comprised  in  one  fam- 
ily, in  which  case  the  aggregate  deduction  in  their  favor 
shall  not  exceed  one  thousand  dollars.  Provided,  further, 
that  in  assessing  the  income  of  any  person  or  corporation 
there  shall  not  be  included  the  amount  received  from  any 
corporation,  as  dividends  upon  the  stock  of  such  corpora- 
tion, if  the  tax  of  two  per  cent,  has  been  assessed  upon  its 
net  profits  by  said  corporation  as  required  by  this  act,  nor 
any  bequest  or  inheritance  otherwise  taxed  as  such. 

Section  5.  Every  corporation  doing  business  for  profit 
in  the  Territory  shall  make  and  render  to  the  assessor  of 
its  tax  division,  between  the  first  and  thirty-first  days  of 
July  of  each  year,  beginning  in  the  year  1901,  a  full  return 
verified  by  oath  or  affirmation  of  its  duly  empowered  offi- 
cer, in  such  form  as  the  Treasurer  of  the  Territory  may 
prescribe,  of  all  the  following  matters  for  the  whole  twelve 
months  ending  June  30th  last  preceding  the  date  of  such 
return : 

First.  The  gross  receipts  of  such  corporation  from  sales 
made  at  home  or  abroad,  and  from  all  kinds  of  business  of 
any  name  or  nature; 

(370) 


Appdx.)  HAWAIIAN   INCOME   TAX   LAW 

Second.  The  expenses  of  such  corporation,  exclusive  of 
interest,  annuities  and  dividends; 

Third.  The  amount  paid  on  account  of  interest,  annui- 
ties and  dividends  stated  separately; 

Fourth.  The  amount  expended  on  permanent  improve- 
ments; 

Fifth.  The  amount  paid  in  salaries  or  compensation  of 
more  than  six  hundred  dollars  to  each  person  employed, 
and  the  name  and  amount  paid  to  each. 

Section  6.  It  shall  be  the  duty  of  all  persons  of  lawful 
age  having  an  income  of  six  hundred  dollars  or  more  for  the 
preceding  year,  from  all  sources,  and  of  all  corporations 
made  liable  to  income  tax,  to  make  and  render  a  list  or  re- 
turn, between  the  first  and  thirty-first  days  of  July  of  each 
year,  in  such  form  as  the  Treasurer  of  the  Territory  may 
direct,  to  the  assessor  of  the  division  in  which  such  persons 
or  corporations  reside,  locate  or  do  business,  of  the  amount 
of  their  or  its  income,  gains  and  profits  as  aforesaid;  and 
all  guardians,  trustees,  executors,  administrators,  agents, 
receivers,  and  all  corporations  or  persons  acting  in  a  fidu- 
ciary capacity,  shall  make  or  render  a  list  or  return,  as 
aforesaid,  to  the  assessor  of  the  division  in  which  such  per- 
son or  corporation,  acting  in  a  fiduciary  capacity,  resides  or 
does  business,  of  the  amount  of  income,  gains,  and  profits 
of  any  minor  or  person  for  whom  they  act;  and  the  assessor 
shall  require  every  list  or  return  to  be  verified  by  the  oath 
or  affirmation  of  the  person  or  authorized  officer  of  the  cor- 
poration making  the  same.  If  any  person  or  corporation 
refuse  or  neglect  to  render  such  return  within  the  time  re- 
quired as  aforesaid,  or  renders  a  return  which  in  the  opin- 
ion of  the  assessor  is  false  and  fraudulent,  or  contains  any 
understatement,  it  shall  be  lawful  for  the  assessor  to  sum- 
mon such  person,  or  any  of  the  officers  of  such  corporation, 
or  any  person  having  possession,  custody  or  care  of  books 

(377) 


INCOME    TAXATION  (Appdx. 

of  account  containing  entries  relating  to  the  business  of 
such  person,  or  corporation,  or  any  other  person  he  may 
deem  proper,  wherever  residing  or  found,  to  appear  before 
him  and  produce  such  books  at  a  time  and  place  named  in 
the  summons,  and  to  give  testimony  or  answer  interroga- 
tions under  oath,  respecting  any  income  liable  to  tax  or  the 
returns  thereof.  False,  willful  testimony,  given  before  such 
assessor  shall  be  deemed  perjury  and  punished  as  such. 

Section  7.  It  shall  be  the  duty  of  every  person  or  cor- 
poration doing  business  for  profit  to  keep  full,  regular  and 
accurate  books  of  accounts  upon  which  all  its  transactions 
shall  be  entered  from  day  to  day  in  regular  order,  which 
books  shall  be  open  to  the  inspection  of  the  assessor  of 
the  division  or  any  person  authorized  by  him  to  inspect  the 
same,  during  business  hours. 

Section  8.  When  any  person  or  corporation  having  a 
taxable  income  refuses  or  neglects  to  render  any  return  or 
list  required  by  law,  or  declines  to  take  oath  or  affirmation 
thereto,  the  assessor  may  make  such  assessments  as  he 
may  consider  just,  and  the  same  shall  be  binding  and  con- 
clusive upon  all  parties  and  shall  not  be  subject  to  appeal. 
In  case  of  any  false  or  fraudulent  return  or  valuation  by 
any  taxpayer,  the  assessor  shall  add  200  per  cent,  to  the 
just  valuation  of  the  income  of  such  taxpayer  and  the 
amount  of  the  tax  assessed  on  such  increase  shall  become 
part  of  the  tax  on  the  said  income. 

Section  9.  Any  person  or  corporation  who  or  which  has 
made  a  legal  return  as  aforesaid  may  appeal  from  the 
amount  assessed  to  the  Tax  Appeal  Court  constituted  un- 
der Act  51  of  the  Session  Laws  of  1896,  in  like  manner  as 
allowed  in  case  of  property  tax  appeals,  and  the  said  court 
is  hereby  authorized  to  hear  and  determine  such  appeals 
subject  to  the  revision  of  the  Supreme  Court  as  provided  in 
the  case  of  property  taxes.  Where  the  words  "valuation  of 

(378) 


Appdx.)  HAWAIIAN    INCOME   TAX   LAW 

property"  or  similar  words  occur  in  said  act  concerning 
such  appeals  the  words  "amount  of  taxable  income"  shall 
be  understood  in  all  proceedings  in  regard  to  appeals  from 
assessments  or  judgments  in  income  tax  matters.  Any 
person  or  corporation  appealing  from  the  assessment  of  the 
assessor  shall  lodge  with  the  assessor  on  or  before  the  first 
day  of  October  of  each  year  a  notice  in  writing  of  his  in- 
tention to  appeal  and  the  grounds  of  such  appeal,  and  de- 
posit with  him  the  costs  of  appeal  as  prescribed  in  case  of 
property  taxes,  which  costs  shall  be  subject  to  the  regula- 
tions prescribed  in  said  act.  The  said  Tax  Appeal  Court 
shall  sit  for  hearing  of  tax  appeals  under  the  authority  of 
this  act  between  the  fifth  and  twenty-fifth  days  of  October 
of  each  year. 

Section  10.  The  taxes  on  income  imposed  shall  be  due  and 
payable  on  or  before  the  fifteenth  day  of  November  of  each 
year;  and  any  sum  or  sums  annually  due  and  unpaid  after 
the  said  fifteenth  day  of  November  shall  have  added  thereto 
ten  per  cent,  on  the  amount  which  shall  be  and  become  a 
part  of  such  tax.  Interest  at  the  rate  of  nine  per  cent,  per 
annum  shall  be  added  to  the  amount  of  such  tax  and  pen- 
alty from  the  time  same  shall  become  due. 

(379) 


INCOME   TAXATION  (Appdx. 


INCOME  TAX  PROVISIONS  IN  STATUTES  OF 

OTHER  STATES 
Massachusetts 

"Personal  estate,  for  the  purpose  of  taxation,  shall  in- 
clude *  *  *  the  income  from  an  annuity,  or  from  ships 
and  vessels  engaged  in  the  foreign  carrying  trade  within 
the  meaning  of  section  seven,  and  the  excess  above  two 
thousand  dollars  of  the  income  from  a  profession,  trade  or 
employment  accruing  to  the  person  to  be  taxed  during  the 
year  ending  on  the  first  day  of  May  of  the  year  in  which 
the  tax  is  assessed.  Incomes  derived  from  property  sub- 
ject to  taxation  shall  not  be  taxed."  Rev.  Laws  Mass.  1902, 
p.  206  (Gen.  Stat.  Mass.  c.  11,  §  4.) 

Tennessee 

"The  amount  of  income  derived  from  United  States 
bonds,  and  all  other  stocks  and  bonds  not  taxed  ad  valor- 
em, shall  be  taxable"  at  the  rate  of  five  per  cent.  Code 
Tenn.  §§  690,  710. 

(380) 


INDEX 


[THE  FIGTTBES  BEFEB  TO  SECTIONS] 


A 

ACCRUED  INTEREST, 

When  taxable,  though  uncollected,  48. 
When  deductible  from  income,  97. 

ACTIONS, 

To  enforce   payment   of  income  tax,  123. 

Compromise  of,  124. 

To  enjoin  collection  of  income  tax,   129. 
To  recover  tax  illegally  collected,  130. 

Appeal  to  Commissioner  as  pre-requisite,  131. 
For  recovery  of  penalties,  132. 

ACTS  OF  CONGRESS, 

Taxing  incomes,  history  and  description  of,  8. 

Text  of,  see  Appendix. 
Construction  and  interpretation  of,  29-31. 

ADMINISTRATORS, 

Income  tax   returns  to   be   made  by,   108. 
When  to  deduct  and  withhold  income  tax,  125. 

ADVERTISING, 

As  "necessary  expense"  of  business,  89. 

AGENTS, 

Income  tax  returns  to  be  made  by,  for  principals,  108. 
When  to  deduct  and  withhold  income  tax,  125. 

AGRICULTURAL  SOCIETIES, 

Validity  of  exemption  of,  from  income  tax,  20. 
Exemption  in  favor  of,  78. 

AGRICULTURE, 

Products  of,  as  taxable  income,  40. 

ALABAMA, 

Income  tax  law  formerly  in  force  in,  8. 

ALIENS, 

Resident,  taxation  of  income  of,  61. 

Income  from   business  or  property   in   United  States,   taxation 

of,  61. 
Deductions  and  allowances  in  case  of  foreign  corporations,  106. 

BL.INC.TAX.  (381) 


382  INDEX 

[The  figures  refer  to  sections] 
AMORTIZATION, 

Of  securities,  allowance  of  deduction  for,  103. 
ANNUITIES, 

Taxable  as  income,  51. 

Collection  of  tax  on,  at  the  source,  125. 
APPEAL  AND  REVIEW, 

Of  assessment  for  income  tax,  118. 

As  pre-requisite  to  suit  for  recovery  back  of  tax,  131. 
APPORTIONMENT, 

As  requisite  of  federal  income  tax  laws,  28. 

Effect  of  Sixteenth  Amendment,  28. 
ART   GALLERIES, 

Income  of,  when  exempt,  82. 
ASSESSMENT, 

Of  income  tax,  117. 

Appeal  and  review  of,  118. 

Not  impeachable  collaterally,  115. 

Illegal,  refund  of  taxes  on,  128. 

Remission  of  penalties,  132. 

ASSOCIATED  WORDS  AND  PHRASES, 

In  income  tax  laws,  construction  of,  31. 
ASSOCIATIONS, 

Unincorporated  and  joint  stock,  liability  to  income  tax,  71. 

Certain,  exempt  from  income  tax,  78-85. 
ASYLUMS, 

Exempt  from  payment  of  income  tax,  81. 
ATTORNEYS, 

Fees  paid  to,  deductible  as  expense  of  business,  89. 
AWARDS, 

Of  money,  as  taxable  income,  38. 

B 

BAD  DEBTS, 

Allowance  of  deduction  for,  100. 
BANKRUPT, 

Persons  or  corporations,  taxation  of  income  of,  65. 
BANKS, 

Collecting  income  from  foreign  investments,  to  deduct  and  pay 
over  tax,  125. 

BENEVOLENT  ASSOCIATIONS, 
Exemption  in  favor  of,   81. 

BEQUESTS, 

When  taxable  as  income  of  legatee,  39. 


INDEX  383 

[The  figures  refer  to  section!] 

BETTERMENTS, 

Cost  of,  not  deductible  as  expenses,  96. 

BOARDS  OF  TRADE, 

Exempt  from  federal  income  tax,  when,  85. 

BONDS, 

State  and  municipal,  taxation  of  income  from,  17. 
Of  United  States,  state  taxation  of  income  from,  17. 
Profits  on  sale  of,  as  income,  46. 
Income  from,  when  taxable,  52. 
Interest  on,  deductible  from  income,  97. 
Deduction  on  account  of  amortization  of,  103. 
Shrinkage  in  value  of,  as  "depreciation,"  101. 
Tax  on  interest  on,  collected  at  the  source,  125. 
Foreign,  collection  of  tax  on  interest  on,  125. 
"Tax  free,"  collection  of  income  tax  on,  125. 

BOOK  ACCOUNTS, 

Uncollected,  when  taxable  as  income,  48. 

BOOKS  AND  PAPERS, 

Oflicial  examination  of,  to  discover  taxable  income,  116. 

BUILDING  AND  LOAN  ASSOCIATIONS, 

Validity  of  exemption  of,  from  income  tax,  20. 
When  exempt  from  tax,  83.  • 

BUILDINGS, 

New,  cost  of,  not  deductible,  96. 

BUSINESS, 

Mercantile,  profits  of,  as  income,  42. 

Foreign,  income  from,  60. 

Conducting  or  carrying  on,  what  constitutes,  62. 

Income  from  several  lines  of,  how  taxed,  C3. 

Expenses  of,  as  allowable  deduction,  89. 

c 

CALIFORNIA, 

Constitutional  provision  as  to  income  taxation  in,  7. 

CAPITAL, 

Change  in  form  of,  or  replacement  of.  not  income,  34. 
Accretion  of,  distinguished  from  income,  47. 

CATTLE, 

Profits  on  raising  and  sale  of,  as  taxable  income,  40. 

CEMETERY  COMPANIES, 

When  subject  to  income  tax,  81. 

CHAMBERS  OF  COMMERCE, 
Exemption  in  favor  of,  85. 


384  INDEX 

[The  figures  refer  to  sections] 

CHARITABLE   ORGANIZATIONS, 

Exemption  of,  constitutional  validity  of,  20. 
Exempt,  what  are,  81. 

CHILDREN, 

Income  of,  when  to  be  included  in  parent's  return,  110. 

CIVIC  ORGANIZATIONS, 

Exemption  in  favor  of,  85. 

CLASSIFICATION, 

Of  persons  and  property  for  income  taxation,  validity  of,  12. 

Equal  protection  of  the  laws,  13. 

Corporations,  partnerships,  and  individuals,  14. 

Residents  and  non-residents,  15. 

Validity  of  exemptions,  20. 
CLUBS, 

Incorporated,  libility  of,  to  income  tax,  72. 

COLLECTION, 

Of  income  tax,  107-125. 

Taxpayers'  returns,  107-113. 

Assessment  of  tax,  117. 

Appeal  and  review  of  assessment,  118. 

When  tax  is  payable,  120. 

Penalties  for  delinquency  and  false  returns,  121. 

Lien  of  tax,  122. 

Process  for  recovery  of  tax,  123. 

Compromise  of  litigation,  124. 

Collection  at  the  source,  125. 

Injunction  does  not  lie  to  prevent,  129. 

COLLECTORS  OF  INTERNAL  REVENUE, 

Duties  of,  as  to  collection  of  income  tax,  107-125. 
To  require  the  rendition  of  returns,  117. 
Not  to  disclose  taxpayers'  returns,  114. 
Duties  of,  where  no  return  is  filed,  115. 

Examination  of  books  and  witnesses,  116. 
Proceedings  by,  for  recovery  of  tax,  123. 
Duties  of,  in  relation  to  compromising  litigation,  124. 
Protest  to,  on  payment  of  tax,  127. 
Suit  against,  for  recovery  of  taxes  paid,  130. 

COLLEGES, 

Exempt  from  income  tax,  82. 

COMMERCE, 

Interstate,  state  taxation  of  income  derived  from,  17. 
Profits  of,  as  taxable  income,  42. 

COMMISSIONER  OF  INTERNAL  REVENUE, 
Authority  to  make  rules  and  regulations,  27. 
Assessment  of  income  tax  by,  117. 


INDEX  385 

[The  figures  refer  to  sections] 

COMMISSIONER  OF  INTERNAL  REVENUE — Continued, 

To  license  persons  collecting  income  from  foreign  sources,  125. 
Refund  by,  of  taxes  illegally  exacted,  128. 
Appeal  to,  as  pre-requisite  to  suit  for  taxes  paid,  131. 
Authority  of,  as  to  remission  of  penalties,  132. 

COMPROMISE, 

Of  suits  to  collect  income  tax,  124. 

CONDEMNATION  PROCEEDINGS, 

Damages  paid  under,  are  not  income,  34. 

CONGRESS, 

Powers  of,  as  to  taxation  of  incomes,  6. 

Effect  of  Sixteenth  Amendment,  6. 
Acts  of,  taxing  incomes,  history  of,  8. 

Text  of,  see  Appendix. 
Power  of,  to  tax  state  corporations,  16. 

To  tax  state  and  municipal  bonds,  17. 

To  tax  salaries  of  federal  and  state  officers,  18. 

CONSERVATORS, 

To  make  income  tax  returns,  108. 

When  to  deduct  and  withhold  income  tax,  125. 

CONSTITUTIONAL  LAW, 

Provisions  of  federal  constitution  affecting  income  tax,  6. 

Provisions  of  state  constitutions,  7. 
Adoption  and  construction  of  Sixteenth  Amendment,  6. 
Constitutionality  of  income  tax  laws,  11-28. 

Requirement  of  due  process  of  law,  11. 

Requirement  of  equality  and  uniformity,  12. 

Equal  protection  of  the  laws,  13. 

Discrimination  between  corporations  and  individuals,  14. 

Discrimination  between  residents  and  non-residents,  15. 

Federal  taxation  of  state  corporations,  16. 

Taxation   of   income   from   non-taxable   property,   17. 

Salaries  of  federal  and  state  officers,  18. 

Exemption  of  incomes  below  a  fixed  sum,  19. 

Exemption  of  classes  of  individuals  or  corporations,  20. 

Allowance  of  deduction  for  taxes  paid,  21. 

Double  taxation,  22. 

Taxing  aggregate  income  of  family,  23. 

Validity  of  graduated  or  progressive  tax,  24. 

Retrospective  operation  of  statute,  25. 

Objections  to  title  or  mode  of  enactment,  26. 

Objections  to  administrative  provisions  of  act,  27. 
Publicity   features   as  "unreasonable   search,"  27. 
Regulations  made  by  administrative  officers,  27. 

Apportionment  of  federal  income  tax,  28. 

BL.INC.TAX. — 25 


386  INDEX 

[The  figures  refer  to  pages] 
CONSTRUCTION, 

Of  income  tax  laws,  29-31. 

Rule  of  strict  construction,  29. 

Statutes  in  pari  materia,  30. 

Associated  words  and  phrases,  31. 
CONTRACTS, 

Uncompleted,  accruing  profit  on,  as  income,  49. 
CORPORATIONS, 

Franchise  tax  on,  distinguished  from  income  tax,  3. 

Federal  excise  tax  of  1909  on,  8. 

Repeal  of  excise   tax  on,  9. 

And  individuals,  discrimination  between,  validity  of,  14. 

Created  by  states,  power  of  Congress  to  tax,  16. 

Exemption  of  classes  of,  validity  of,  20. 

Mining,  taxation  of  income  of,  41. 

Profits  of,  from  unauthorized  business,  taxable  as  income,  43. 

Dividends  of,  as  income  of  stockholder,  53. 

Stock  dividends,  54. 

Surplus  or  undivided  profits,  55. 

Right  to  subscribe  for  new  stock,  56. 

Sale  and  distribution  of  assets,  57. 
Subject  to  income  tax,  69. 

Domestic,  with  foreign  branches  or  agencies,  60. 

Foreign,  doing  business  in  United   States,  61. 

Conducting  several  lines  of  business,  63. 

Officers  of,  taxation  of  salaries  of,  64. 

Bankrupt  and  insolvent,  65. 

Effect  of  dissolution  on  liability  for  tax,  66. 

Public  service  companies,  70. 

Unincorporated  associations,  71. 

Incorporated  clubs,  72. 

Inactive  and  holding  companies,  73. 

Of  Philippines  and  Porto  Rico,  74. 

Insurance  companies,  75. 
Certain,  exempt  from  income  tax,  77-85. 
Dividends  on  stock  of,  deductible  from  income,  104. 
Foreign,  deductions  allowed  in  case  of,  106. 
To  deduct  and  withhold  income  tax  when,  125. 
To  make  returns  of  income  for  taxation,   107. 

COSTS, 

In  suits  for  recovery  of  taxes  illegally  collected,  130. 

COURTS, 

Jurisdiction  of  suit  for  recovery  of  taxes  illegally  collected,  130. 
CROPS, 

Profit  on  sale  of,  as  taxable  income,  40. 
Products  consumed  by  family,  40. 
Crops  unsold  at   end   of   year,   40. 


INDEX  387 

[The  figures  refer  to  sections] 

D 

DEBTS, 

Uncollected,  when  taxable  as  income,  48. 
Interest  on,  when  deductible,  97. 
Worthless,  deduction  allowed  for,  100. 

DECEDENTS, 

Liability  of  estates  of,  to  income  tax,  66. 
Proceeds  of  life  insurance  exempt,  87. 
Income-tax  returns  for  estates  of,  108. 

DEDUCTIONS, 

Constitutional  validity  of  allowance  for,   19. 

Incomes  below  a  fixed  sum,  19. 

Other  taxes  paid,  21. 

Income  from  property  otherwise  taxed,  86. 
Proceeds  of  life  insurance,  87. 
Fixed  amount  of  income  exempt,  88. 
Expenses  of  business,  89. 

Wages  and  salaries,  90. 

Traveling  expenses,  91. 

Cost  of  insurance,  92. 

Rent  of  land,  buildings,  or  equipment,  93. 

Mining  operations,  94. 

Judgments,  95. 

Repairs,  new  buildings,  and  improvements,  96. 
Interest  on  indebtedness,  97. 
Taxes  accrued  or  paid,  98. 
Losses  uncompensated,  99. 
Debts  written  off  as  worthless,  100. 
Depreciation  of  property,   101. 
Depletion  of  ores  and  other  natural  deposits,  102. 
Amortization  of  bonds,  103. 

Dividends  from  corporations  subject  to  tax,  104. 
Special  rules  as  to  insurance  companies,  105. 
Rules  as  to  foreign  corporations,  106. 
Method  of  claiming,  in  case  of  collection  at  the  source,  125, 

DEFINITIONS, 
Income  tax,  1. 
Income,  32. 
Gains,  33. 
Profits,  33. 

DEPRECIATION   OF   PROPERTY, 
Allowance  of  deduction  for,  101. 

In  case  of  mining  companies,   102. 
Amortization  of  bonds,  103. 


388  INDEX 

[The  figures  refer  to  sections! 

DIRECT  TAXES, 
Defined,  5. 
Income  taxes  as,  5. 

DISCOUNTS, 

Allowance  of  deduction  for,  97. 

DISSOLUTION  OF  CORPORATION, 

As  affecting  liability  to  income  tax,  66. 
As  affecting  lien  of  income  tax,  122. 

DISTRAINT, 

Enforcing  payment  of  income  tax  by,  123. 

DISTRICT   OF  COLUMBIA, 

Salaries  of  officers  and  employes  of,  taxable,  64. 

DIVIDENDS, 

On  corporate  stock,  as  taxable  income,  53. 

Stock  dividends,  54. 

Surplus  or  undivided  profits,  55. 

Right  to  subscribe  for  new  stock,  56. 
Deduction  of,  from  return  of  income,  104. 
Of  foreign  corporations,  collection  of  income  tax  on,  125. 

DOUBLE  TAXATION, 

Constitutional  objections  to,  applied  to  income  tax,  22. 

DUE  PROCESS  OF  LAW, 

Requirement  of,  in  income  taxation,  11. 

DWELLING  HOUSE, 

Occupied  by  owner,  taxation  of  rental  value  of,  36. 

E 

EARNINGS, 

From  profession  or  trade,  as  taxable  income,  37. 

EDUCATIONAL  INSTITUTIONS, 
Validity  of  exemption  of,  20. 
When  exempt  from  income  tax,  82. 

EMBEZZLEMENT, 

Loss  sustained  by,  deductible  from  income,  99. 

EMINENT  DOMAIN, 

Land  damages  paid  under,  not  income,  34. 

ENGLAND, 

Income  tax  laws  of,  8,  9. 
Fixed  exemption  in,  88. 

EQUAL  PROTECTION  OF  THE  LAWS, 

Guaranty  of,  as  applied  to  income  taxes,  13. 


INDEX  389 

[The  figures  refer  to  sections] 

EQUALITY, 

Constitutional  requirement  of,  applied  to  income  taxes,  12. 
Equal  protection  of  the  laws,  13. 

Discrimination  between  persons  and  corporations,  14. 
Discrimination  between  residents  and  non-residents,  15. 
Validity  of  exemptions,  19,  20. 
Graduated  or  progressive  tax,  24. 

ESTATES, 

Of  decedents,  liability  of,  to  income  tax,  66. 
Proceeds  of  life  insurance  exempt,  87. 
Income-tax  returns  to  be  made  for,  108. 

EVIDENCE, 

Taking  of,  to  determine  amount  of  taxable  income,   116. 

EXCISE  TAXES, 

Income  tax  distinguished  from,  3. 

EXECUTORS, 

Paying  income  tax  for  decedent's  estate,  66. 

To  make  income  tax  returns,  108. 

When  to  deduct  and  withhold  income  tax,  125. 

EXEMPTIONS, 

Constitutional  validity  of,  19,  20. 

Incomes  below  a  fixed  sum,  19. 

Classes  of  individuals  or  corporations,  20. 
Revenues  of  United  States,  76. 
States  and  municipal  corporations,  77. 
Agricultural  and  horticultural  societies,  78. 
Labor  organizations,  79. 
Fraternal  orders  and  benefit  societies,  80. 
Religious  and  charitable  associations,  81. 
Educational  and  scientific  institutions,  82. 
Building  and  loan  associations,  83. 
Savings  institutions,  84. 

Civic  organizations  and  chambers  of  commerce,  85. 
Income  from  property  otherwise  taxed,  86. 
Proceeds  of  life  insurance  policies,  87. 
Exemption  of  fixed  amount  of  income,  88. 
Specific  deductions  and  allowances,  89-106. 
Method  of  claiming,  in  case  of  collection  at  the  source,  125. 

EXPENSES, 

Allowance  of  deduction  for,  89, 
Wages  and  salaries,  90. 
Traveling  expenses,  91. 
Cost  of  insurance,  92. 
Rent  of  land,  buildings,  or  equipment,  93. 
Mining  operations,  94. 
Judgments,  95. 


390  INDEX 

.[The  figures  refer  to  sections] 

F 

FALSE   RETURNS, 

For  income  tax,  penalty  for  making,  121. 

FAMILY, 

Taxing  aggregate  income  of,  validity  of,  23. 
Including  income  of,  in  taxpayer's  return,  110. 

FARMING, 

Products  of,  as  taxable  income,  40. 
Exemption  of  agricultural  societies,  78. 

FEDERAL  CONSTITUTION, 
See  Constitutional  Law. 

FEDERAL  OFFICERS, 

Salaries  of,  not  taxable  by  states,  18. 

Disbursing  officers  to  withhold  and  pay  income  tax  of,  125. 

FEDERAL  STATUTES, 

Taxing  incomes,  history  of,  8. 

Text  of,  see  Appendix. 
Construction  and  interpretation  of,  29-31. 

FEES, 

As  taxable  income,  37,  64. 

Paid  to  attorneys,  deductible  as  expenses,  89. 

FOREIGN  COUNTRIES, 

Taxation  of  income  derived  from  property  or  investments  in,  59. 
Domestic  corporations  with  branches   or  agencies  in,  60. 
Income  from,  method  of  collecting  tax  on,  125. 

FOURTEENTH  AMENDMENT, 

Application  of,  to  income  taxation,  11,  13. 

FRANCHISE  TAX, 

Income  tax  distinguished  from,  3. 

Laying  income  tax  in  addition  to,  as  double  taxation,  22. 

FRATERNAL  ORDERS, 

Validity  of  exemption  of,  from  income  tax,  20. 
When  exempt  from  income  tax,  80. 

FRAUD, 

In  income-tax  returns,  penalty  for,  121. 

FRUIT-GROWERS  ASSOCIATION, 

When  exempt  from  income  tax,  78. 

G 

GAINS, 

Defined,  33. 

Change  of  capital  or  investment  distinguished  from,  34. 


INDEX  391 

[The  figures  refer  to  sections] 

GAMBLING, 

Money  won  at,  as  taxable  income,  38. 

GAS  WELLS, 

Allowance  for  depreciation  in,  102. 

GIFTS, 

Of  money  or  property,  as  taxable  income,  38. 
Legacies  and  inheritances,  39. 

GOOD-WILL, 

No  allowance  for  depreciation  in,  101. 

GRADUATED  INCOME  TAX, 
Constitutional  validity  of,  24. 
Rates  of  taxation,  119. 

GROSS  RECEIPTS, 

Tax  on,  as  an  income  tax,  4. 

GROUND   RENTS, 

Not  taxable  as  income,  35. 

GUARDIANS, 

To  make  income-tax  returns  for  wards,  108. 

H 

HAWAII, 

Adoption  of  Income  tax  law  by,  8. 

Text  of  income  tax  law  of,  see  Appendix. 

HOLDING  COMPANIES, 

Liability  of,  to  income  tax,  73. 

Not  entitled  to  deduct  dividends  from  constituent  companies,  104. 

HOSPITALS, 

Exempt  from  payment  of  income  tax,  81. 

HUSBAND, 

When  to  include  wife's  income  in  his  return,  110. 

I 

IMPROVEMENTS, 

Cost  of,  not  deductible  as  expense,  96. 

INCOME, 

Taxable,  what  constitutes,  32-57. 

General  definitions  of,  32. 

"Profits"  and  "gains"  distinguished,  33. 

Change  or  substitution  of  capital  distinguished  from,.  34. 

Rent  of  land  as,  35. 

Royalties  on  oil  or   mining  lease,  35. 

Rental  value  of  residence,  36. 


392  INDEX 

[The  figures  refer  to  sections] 

INCOME— Continued, 

Salaries   and   earnings   from   professions   and   trades,   37. 

Pensions,  gifts,  prizes,  and  awards,  38. 

Legacies  and  inheritances,  39. 

Products  of  agriculture  or  stock-raising,  40. 

Produce  of  mines  and  oil  and  gas  wells,  41. 

Profits  of  mercantile  business,  42. 

Profits  from  unauthorized  business,  43. 

Income  from  partnership  business,  44. 

Profits  on  sale  of  real  estate,  45. 

Profits  on  sale  of  securities,  46. 

Increase  in  value  not  realized  by  sale,  47. 

Uncollected  interest  and  accounts,  48. 

Profit  to  accrue  on  uncompleted  contracts,  49. 

Profits  from  sale  or  lease  of  patent  rights,  50. 

Annuities,  51. 

Interest  on  government  bonds,  52. 

Dividends  on  corporate  stock,  53. 

Stock  dividends,  54. 

Stockholder's  interest  in  surplus  or  undivided  profits,  55. 

Right  to  subscribe  for  new  stock,  56. 

Sale  and  distribution  of  corporate  assets,  57. 

From  foreign  investments,  taxation  of,  59. 

Exemptions  and  exceptions,  76-88. 

Deductions  from,  for  taxation,  what  allowed,  89-106. 

Taxpayer's  return  of,  and  collection  of  tax,  107-125. 

INCOME  TAX, 
Nature  of,  1. 

Distinguished  from  taxes  on  property,  2. 
Distinguished  from  license  and  franchise  taxes,  3. 
Tax  on  gross  receipts  as,  4. 
Is  a  "direct"  tax,  5. 
Constitutional  provisions  as  to,  6,  7. 
History  of,  8. 

Enumeration  of  statutes  in  force,  9. 
Economic  aspects  of,  10. 
Constitutional  validity  of,  11-28. 
Construction  and  interpretation  of,  29-31. 
What  constitutes  taxable  income,  32-57. 
Persons  and  corporations  subject  to,  58-75. 
Corporations  and  associations  exempt,  76-85. 
Returns  for  purpose  of,  and  collection  of  tax,  107-125. 
Refund  and  recovery  of  taxes  illegally  exacted,  126-132. 

INCREMENT,  UNEARNED, 

Taxation  of,  as  income,  45. 
INHERITANCES, 

When  taxable  as  income,  39. 


INDEX  393 

[The  figures  refer  to  sections] 

INJUNCTION, 

To  prevent  payment  or  collection  of  income  tax,   129. 

INSOLVENT, 

Persons  or  corporations,  taxation  of  income  of,  65. 
Income-tax  return  for  estate  of,  108. 

INSURANCE, 

Life,  proceeds  of,  exempt  from  income  tax,  87. 
Cost  of,  as  allowable  deduction,  92. 

INSURANCE  COMPANIES, 

Validity  of  income  tax  law  exempting,  20. 

Liability  of,  to  income  tax,  75. 

Deductions  and  allowances  in  case  of,  105. 

To  deduct  and  pay  over  income  tax  of  beneficiaries,  125. 

INTEREST, 

As  taxable  income,  32. 

Uncollected,  whether  taxable  as  income,  48. 

On  government  bonds,  taxability  of,  52. 

Paid,  deductible  from  income,  97. 

Adding,  as  penalty  for  delinquency,  121. 

From  abroad,  method  of  collecting  income  tax  on,  125. 

In  suits  for  recovery  of  taxes  illegally  collected,  130. 

INTERSTATE  COMMERCE, 

State  taxation  of  income  derived  from,  17. 
INTERPRETATION, 

Of  income  tax  laws,  29-31. 

Rule  of  strict  construction,  29. 
Statutes  in  pari  materia,  30. 
Associated  words  and  phrases,  31. 


JOINT  GUARDIANS  AND  TRUSTEES, 

Income  tax  return  by  one  of,  when  sufficient,  108. 

JOINT  OWNERS, 

Income  from  property  of,  how  taxed,  63. 

JOINT  STOCK  COMPANIES, 

Liability  of,  to  income  tax,  71. 

JUDGES, 

Taxation  of  salaries  of,  18. 

JUDGMENT, 

For  money,  as  taxable  income,  38. 

When  allowable  as  a  deduction,  95. 

Against  collector,  for  taxes  illegally  collected,  130. 


394  INDEX 

[The  figures  refer  to  sections] 
JURISDICTION, 

Of  suit  for  recovery  of  taxes  illegally  collected,  130. 

L 

LABOR  UNIONS, 

Validity  of  income  tax  law  exempting,  20. 

Exemption  in  favor  of,  79. 
LAND, 

Rent  of,  as  taxable  income,  35. 

Profit  on  sales  of,  taxable  as  income,  45. 

Rent  of,  allowed  as  a  deduction,  93. 

LANDLORD  AND  TENANT, 

Rent  of  land  as  income  of  landlord,  35. 

Deduction  of  taxes  paid  by  tenant,  98. 

Who  to  make  return  of  rent  for  taxation,  108,  125. 
LEASED  CORPORATIONS, 

Taxability  of  income  of,  73. 

LEGACIES, 

When  taxable  as  income  of  legatee,  39. 
LEGAL  EXPENSES, 

Deductible  as  expenses  of  business,  §  89. 

LESSEES, 

See  Landlord  and  Tenant. 

LIBRARIES, 

Public,  income  of,  when  exempt,  82. 
LICENSE  TAX, 

Income  tax  distinguished  from,  3. 

Laying  income  tax  in  addition  to,  as  double  taxation,  22. 

Deductible  as  necessary  expense  of  business,  89. 
LIEN, 

Of  income  tax,  122. 

LIFE  INSURANCE, 

Proceeds  of,  exempt  from  income  tax,  87. 
LIVE  STOCK, 

Profits  on  raising  or  sale  of,  as  taxable  income,  40. 
LOSSES, 

Deduction  allowed  for,  if  not  compensated,  99. 
LOUISIANA, 

Income  tax  law  formerly  in  force  in,  8. 

M 

MARRIED  WOMEN, 

When  to  make  separate  return  of  income,  110. 


INDEX  395 

[The  flgurea  refer  to  sections] 

MASSACHUSETTS, 

Adoption  of  income  tax  law  by,  8. 

Text  of  income  tax  law  of,  see  Appendix. 

MERCHANDISE, 

Profits  on  sales  of,  as  income,  42. 

MINING, 

Royalty  on  lease  of  mining  property,  as  income,  35. 
Profits  from  sale  of  ore,  as  taxable  income,  41. 
Cost  of  development  work  as  allowable  deduction,  94. 
Allowance  for  depletion  of  ores,  102. 

MISSOURI, 

Income  tax  law  formerly  in  force  in,  8. 

MORTGAGES, 

Deduction  of  taxes  paid  by  mortgagee,  98. 
Mortgagor  to  deduct  and  pay  income  tax,  when,  125. 
Foreign,  method  of  collecting  tax  on  income  from,  125. 

MUNICIPAL  CORPORATIONS, 

Taxation  of  income  from  bonds  of,  17. 
Revenues  of,  exempt  from  income  tax,  77. 

MUSEUMS, 

Income  of,  when  exempt,  82. 

N 

NON-RESIDENTS, 

Discrimination  against,  in  income  tax  laws,  validity  of,  15. 
Having  property  or  business  in  United  States,  taxation  of,  61. 
Foreign  corporations,  deductions  allowed  in  case  of,  106. 

NORTH  CAROLINA, 

Constitutional  provision  as  to  income  tax  in,  7. 

Adoption  of  income  tax  law  by,  8. 

Income  taxation  in  force  in,  9. 

Text  of  income  tax  law  of,  see  Appendix. 

o 

OBSOLESCENCE, 

Depreciation  by,  allowance  of  deduction  for,  101. 

OCCUPATION  TAX, 

Distinguished  from  income  tax,  3. 

Laying  income  tax  in  addition  to,  as  double  taxation,  22, 

Amount  of,  deductible  as  expense  of  business,  89. 

OCCUPATIONS, 

Earnings  from,  as  taxable  income,  37. 

Earnings  from  several,  taxable  as  one  income,  63. 

Certain,  exempt  from  income  tax,  78-85. 


396  INDEX 

[The  figures  refer  to  sections] 

OFFICERS, 

Federal  and  state,  taxation  of  salaries  of,  18. 
Tax  regulations  made  by,  validity  of,  27. 
Salaries  of,  taxable  as  income,  64. 
Withholding  and  paying  income  tax  on  salaries,  125. 

OIL  WELLS, 

Royalty  on  lease  of,  as  income,  35. 
Profits  of,  taxable  as  income,  41. 
Cost  of  sinking,  as  allowable  deduction,  94. 
Allowance  for  depletion,  102. 

OKLAHOMA, 

Adoption  of  income  tax  law  by,  8. 

Text  of  income  tax  law  of,  see  Appendix. 

PARTNERSHIPS, 

And  corporations  or  individuals,  validity  of  discrimination  be- 
tween, 14. 

Profits  of,  as  income  of  individual  partner,  44. 
Liability  of,  to  income  tax,  67. 
Limited  partnerships,  68. 

PATENTS, 

Profit  on  sale  or  lease  of,  as  taxable  income,  50. 
PAYMENT, 

Of  income  tax,  time  for,  120. 

Penalties  for  delinquency,  121. 
Process  to  enforce,  123. 
Of  income  tax  at  the  source,  125. 
Of  income  tax  under  protest,  127. 

PENALTIES, 

For  unlawfully  divulging  income  tax  returns,  114. 

For  failure  to  make  income  tax  return,  121. 

For  non-payment  of  tax,  121. 

For  false  or  fraudulent  return,  121. 

Remission  or  refund  of,  128,  132. 

PENSIONS, 

As  taxable  income,  38. 

PHILIPPINES, 

Corporations  doing  business  In,  liability  to  income  tax,  74. 
Officers  and  employe's  of,  taxable  on  salaries,  64. 

PORTO  RICO, 

Corporations  doing  business  in,  liability  to  income  tax,  74. 
Officers  and  employe's  of,  taxable  on  salaries,  64. 


INDEX  397 

[The  figures  refer  to  sections] 

POSTMASTERS, 

Salary  of,  not  taxable  by  states,  18. 

PRESIDENT  OF  THE  UNITED  STATES, 
Taxation  of  salary  of,  18. 

PRINCIPAL  PLACE  OF  BUSINESS, 

Of  corporation,  meaning  of,  112. 

PRIZES, 

Pecuniary,  as  taxable  income,  38. 

PROFESSIONS, 

Earnings  from,  as  taxable  income,  37. 
Expenses  of,  as  allowable  deduction,  89. 

PROFITS, 

Defined,  33. 

Change  or  replacement  of  capital  distinguished  from,  34. 

Of  mercantile  business,  what  taxable,  42. 

From  unauthorized  business,  taxable  as  income,  43. 

On  sale  of  land,  as  taxable  income,  45. 

On  sale  of  securities,  when  taxable,  46. 

Mere  increase  in  value  is  not,  47. 
On  sale  or  lease  of  patent  rights,  50. 
To  accrue  on  uncompleted  contract,  49. 
Of  corporation,  undivided,  not  income  of  stockholder,  55. 

PROGRESSIVE  TAXATION, 
Constitutional  validity  of,  24. 
Rates  of  taxation,  119. 

PROPERTY, 

Taxes  on,  distinguished  from  income  tax,  2. 
Profits  on  sale  of,  as  income,  45,  46. 
Taxed,  income  from,  exempt,  86. 
Rent  of,  an  allowable  deduction,  93. 
Allowance  for  depreciation  of,  101. 

PROTECTION  OF  THE  LAWS, 

Equal,  guaranty  of,  applied  to  income  taxes,  13. 

PROTEST, 

Payment  of  income  tax  under,  saving  right  to  sue,  127. 

PUBLIC  SERVICE  CORPORATIONS, 
Liability  of,  to  income  tax,  70. 

PUBLICITY, 

Constitutional   objections   to  publicity   features  of  income   tax 

laws,  27. 

Statutory  provisions  as  to,  113. 
Penalties  for  unlawfully  divulging  information,  114, 


398  INDEX 

[The  figures  refer  to  sections] 

T5 

RAILROADS, 

In  Alaska,  tax  on  income  of,  74. 
RANCHING, 

Profits  of,  as  taxable  income,  40. 
RATES, 

Of  assessment  under  income  tax  laws,  119. 
REAL  ESTATE, 

Rent  of,  as  taxable  income,  35. 

Profits  on  sale  of,  taxable  as  income,  45. 

Rent  of,  an  allowable  deduction,  93. 

Allowance  for  depreciation  of,  101. 

RECEIPTS, 

Gross,  tax  on,  as  an  income  tax,  4. 

RECEIVER, 

Income  from  business  or  property  in  hands  of,  65. 

Returns  to  be  made  by,  108. 

To  withhold  and  pay  over  income  tax,  125. 

RECOVERY, 

Of  income  taxes  illegally  collected,  126-132. 

REFUND, 

Of  income  taxes  illegally  exacted,  128. 
Remission  of  penalties,  132. 

REGULATIONS, 

Authority  of  administrative  officers  to  make,  27. 

RELIGIOUS  SOCIETIES, 

Exemption  of,  constitutional  validity  of,  20. 
Exemption  in  favor  of,  81. 

RENT  OF  LAND, 

As  taxable  income,  35. 

Royalties  on  mining  or  oil  lease,  35. 
Rental  value  of  residence,  when  taxable,  36. 
As  allowable  deduction,  93. 
Tax  on  income  from,  how  collected,  125. 

REPAIRS, 

Cost  of,  deductible  from  income,  96. 

REPEAL, 

Of  corporation  tax  law  of  1909,  9. 

RESIDENCE, 

Occupied  by  owner,  taxation  of  rental  value  of,  36. 


INDEX  389 

[The  figures  refer  to  sections] 

RESIDENTS, 

And  non-residents,  validity  of  discrimination  between,  15. 
Taxation  of  income  of,  58. 

Who  are,  58. 

Income  from  foreign  property  and  investments,  59. 
Tax  on,  how  collected,  125. 

RETROSPECTIVE  LAWS, 

Validity  of  income  tax  as  applied  to  income  of  current  year,  25. 

RETURNS, 

Of  income,  for  taxation,  107. 
Who  required  to  make,  107. 

By  guardians,  trustees,  and  other  fiduciaries,  108. 
Form  and  contents  of,  109. 
Including  income  of  wife  and  children,  110. 
Time  for  filing,  111. 
Where  to  be  filed,  112. 
Publicity  or  inspection  of,  113. 
Proceedings  where  no  return  filed,  115. 
Penalties  for  delinquency  and  false  returns,  121. 

ROYALTIES, 

On  mining  or  oil  lease,  taxable  as  income,  35. 

RULES, 

For  return  and  collection  of  income  tax,  authority  of  officers 
to  make,  27. 

s 

SALARY, 

Taxable  as  income,  37. 

Of  state  and  federal  officers,  18. 
Of  officers  generally,  liability  to  tax,  64. 
Deductible  as  expense  of  business,  90. 
Income  tax  on,  how  collected,  125. 

SALES, 

Of  merchandise,  profits  on,  taxable  as  income,  42. 
Of  agricultural  products,  40. 
Of  products  of  mining  operations,  41. 
Of  real  estate,  45. 
Of  securities  and  investments,  46. 
Of  patent  rights,  50. 
Of  assets  of  corporation,  57. 

SAVINGS  BANKS, 

Validity  of  exemption  of,  from  income  tax,  20. 

Taxability  of  income  of,  69. 

When  exempt  from  income  tax,  84. 


400  INDEX 

[The  figures  refer  to  sections] 

SCHOOLS, 

When  exempt  from  income  tax,  82. 

SCIENTIFIC  INSTITUTIONS, 
Income  of,  exempt,  82. 

SEARCHES  AND  SEIZURES, 

Publicity  features  of  income  tax  law  as  authorizing,  27. 

SECURITIES, 

Profits  on  sale  of,  as  taxable  income,  46. 

Increase  in  value  not  realized  by  sale,  47. 
Foreign,  taxation  of  income  from,  59. 
Allowance  for  amortization  of,  103. 
Shrinkage  in  value  of,  as  "depreciation,"  101. 
Foreign,  method  of  collecting  tax  on  income  from,  125. 

SELF-CRIMINATION, 

Objections  to  income  tax  laws  as  requiring,  27. 

SIXTEENTH  AMENDMENT, 
Adoption  of,  6. 
Not  a  grant  of  new  powers,  6. 

SOUTH  CAROLINA, 

Adoption  of  income  tax  law  by,  8. 

Text  of  income  tax  law  of,  see  Appendix. 

SPECIAL  TAX, 

Income  tax  as  a,  1. 

STATES, 

Constitutional  provisions  in,  affecting  income  tax,  7. 
Adoption  of  income  tax  by  various,  8. 
Text  of  income  tax  laws  of,  see  Appendix. 
Constitutionality  of  income  tax  laws  of,  11-28. 
Corporations  created  by,  power  of  Congress  to  tax,  16. 
Officers  of,  taxation  of  salaries  of,  18. 
Duplication  of  taxes  between  state  and  United  States,  22. 
Taxation  by,  of  income  from  United  States  bonds,  17. 
Tax  laws  of,  construction  of,  29-31. 
Income  of,  not  subject  to  tax,  77. 

STATUTES, 

Taxing  incomes,  history  of,  8. 

Enumeration  of  those  in  force,  9. 

Text  of,  see  Appendix. 

Construction  and  interpretation  of,  29-31. 

Rule  of  strict  construction,  29. 

Statutes  in  pari  materia,  30. 

Associated  words  and  phrases,  31. 
Repeal  of  1909  excise  tax  law,  9. 


INDEX  401 

[The  figures  refer  to  sections] 

STEAMSHIP  COMPANIES, 

Foreign,  taxable  on  business  done  in  United  States,  61. 
Allowance  for  depreciation  of  property  of,  101. 

STOCK  RAISING, 

Profits  on,  as  taxable  income,  40. 

STOCKHOLDERS, 

Dividends  to,  taxable  as  income,  53. 

Stock  dividends,  54. 

Surplus  or  undivided  profits,  55. 
Right  of,  to  subscribe  for  new  stock,  is  not  income,  56. 

STOCKS, 

Shrinkage  in  value  of,  as  "depreciation,"  101. 

STRICT  CONSTRUCTION, 

Applied  to  income  tax  laws,  29. 
SUITS, 

To  enforce  payment  of  income  tax,  123. 

Compromise  of,  124. 
To  recover  taxes  illegally  exacted,  126-132. 

Payment  under  protest,  127. 

Suit  to  enjoin  collection,  129. 

Suit  for  recovery  of  taxes,  130. 

Appeal  to  Commissioner  as  pre-requisite,  131. 

Remission  of  penalties,  132. 

SUPER-TAX, 

Constitutional  validity  of,  24. 
Rates  of  taxation,  119. 

SURPLUS, 

Stockholder's  interest  in,  not  income,  55. 

SYNDICATES, 

Liability  of,  to  income  tax,  71. 

T 

TAXES, 

Accrued  or  paid,  deduction  allowed  for,  98. 
In  case  of  foreign  corporations,  106. 

TENNESSEE, 

Constitutional  provision  as  to  income  taxation  in,  7. 

Income  taxation  in  force  in,  8,  9. 

Text  of  income  tax  law  in,  see  Appendix. 

TEXAS, 

Constitutional  provision  as  to  income  tax  in,  7. 

TIME, 

For  filing  income-tax  returns,  111. 
For  payment  of  income  tax,  120. 
BL.INC.TAX. — 26 


402  INDEX 

[The  figures  refer  to  sections] 

TRADES, 

Earnings  from,  as  taxable  income,  37. 
Trades  unions  exempt,  79. 

TRAVELING  EXPENSES, 

When  deductible  as  expense  of  business,  91. 

TRUSTEES, 

To  make  income-tax  returns  for  beneficiaries,  108. 
To  withhold  and  pay  over  income  tax,  125. 

TRUSTS, 

Liability  of,  to  income  tax,  73. 

u 

ULTRA  VIRES, 

Taxation  of  income  from  unauthorized  business,  43. 

UNDIVIDED  PROFITS, 

Stockholder's  interest  in,  not  income,  55. 

UNEARNED  INCREMENT, 
Taxation  of,  as  income,  45. 

UNIFORMITY, 

Constitutional  requirement  of,   applied  to  income  taxes,  12. 

UNINCORPORATED  ASSOCIATIONS, 
Liability  of,  to  income  tax,  71. 

UNIONS, 

Labor,  exempt  from  income  tax,  79. 

UNITED  STATES, 

State  tax  on  income  from  bonds  of,  17. 

Revenue  of,  not  subject  to  income  tax,  76. 

Suit  against,  for  recovery  of  taxes  illegally  collected,  130. 

UNIVERSITIES, 

Exempt  from  income  tax,  82. 

V 

VIRGINIA, 

Adoption  of  income  tax  law  by,  8. 

Text  of  income  tax  law  of,  see  Appendix. 

VOCATIONS, 

Earnings  from,  as  taxable  income,  37. 

w 

WAGERS, 

Winnings  on,  as  taxable  income,  38. 


INDEX  403 

[The  figures  refer  to  sections] 

WAGES, 

Paid,  deductible  as  expense  of  business,  90. 
Deduction  of  income  tax  from,  125. 

WATERWORKS, 

Municipal,  whether  subject  to  income  tax,  77. 

WEAR  AND  TEAR, 

Allowance  of  deduction  for  depreciation  by,  101. 

WIFE, 

Including  income  of,  in  husband's  return,  110. 
When  to  make  separate  return,  110. 

WISCONSIN, 

Constitutional  provision  as  to  income  tax  in,  7. 

Adoption  of  income  tax  by,  8. 

Income  tax  in  force  in,  9. 

Text  of  income  tax  law  of,  see  Appendix. 

WITNESSES, 

Examination  of,  to  fix  amount  of  taxable  income,  116. 

WORDS  AND  PHRASES, 

In  income  tax  laws,  construction  of,  29-31. 


[END  OF  VOLUME] 


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